Last week brought about quite a stir in the Singapore REIT (SREIT) market. Prices have been on a downward ride, and investors are left scratching their heads, wondering what’s causing this unexpected turbulence.
A quick look at the broader benchmark, the iEdge S-REIT Index, reveals a stark reality. In just one week, we’ve witnessed a significant drop of over 5%, bringing us very close to the lows we experienced during the depths of the pandemic back in 2020.
Zooming in on individual SREITs, the impact of this downturn can be seen across sectors. Notably, blue-chip REITs like Ascendas, Mapletree, and CapitaLand have taken a hard hit this week. In contrast, smaller-cap REITs have managed to weather the storm better, although it’s important to acknowledge that they’ve already faced a challenging year.
| Sector | REITS | 1 Week Performance |
| Data Centre | Keppel DC REIT | -15.27% |
| Hospitality | ARA US Hospitality Trust | -9.43% |
| Office | Prime US REIT | -8.55% |
| Data Centre | Digital Core REIT | -8.18% |
| Industrial | CapitaLand Ascendas REIT | -8.15% |
| Industrial | Mapletree Logistics Trust | -6.92% |
| Diversified | Mapletree Pan Asia Commercial Trust | -6.52% |
| Hospitality | Far East Hospitality Trust | -5.83% |
| Diversified | CapitaLand China Trust | -5.71% |
| Diversified | Frasers Logistics & Commercial Trust | -5.61% |
| Diversified | CapitaLand Integrated Commercial Trust | -5.52% |
| Hospitality | CDL Hospitality Trust | -4.95% |
| Diversified | Lendlease Global Commercial REIT | -4.81% |
| Diversified | CapitaLand India Trust | -4.67% |
| Industrial | Mapletree Industrial Trust | -4.48% |
| Hospitality | CapitaLand Ascott Trust | -4.37% |
| Industrial | AIMS APAC REIT | -3.85% |
| Healthcare | Parkway Life REIT | -3.83% |
| Industrial | ESR-LOGOS REIT | -3.64% |
| Office | Keppel REIT | -3.61% |
| Retail | Sasseur REIT | -3.08% |
| Office | IREIT Global | -2.78% |
| Retail | Paragon REIT | -2.41% |
| Retail | Frasers Centrepoint Trust | -2.37% |
| Retail | United Hampshire US REIT | -2.33% |
| Diversified | OUE Commercial REIT | -2.17% |
| Hospitality | Frasers Hospitality Trust | -1.98% |
| Diversified | Suntec REIT | -1.75% |
| Diversified | Cromwell European REIT | -1.55% |
| Industrial | Sabana Industrial REIT | -1.28% |
| Retail | Starhill Global REIT | -1.03% |
| Office | Keppel Pacific Oak US REIT | 0% |
| Industrial | Daiwa House Logistics Trust | 0% |
| Office | Manulife US REIT | 2.04% |
| Office | Elite Commercial REIT | 2.08% |
| Healthcare | First REIT | 2.17% |
| Retail | BHG Retail REIT | 4.40% |
| Retail | Dasin Retail Trust | 11.11% |
| Retail | Lippo Malls Indonesia Retail Trust | 18.75% |
| Industrial | EC World REIT | Suspended |
| Hospitality | Eagle Hospitality Trust | Suspended |
The question on everyone’s mind is: What’s causing this sudden drop in the REIT market?
Let’s dive deeper into the factors contributing to this unexpected turbulence and try to make sense of the situation.
Interest Rate Uncertainty
The prevailing uncertainty around interest rates is a significant factor at play here. Many had hoped that the high-interest rates were already factored in and that things would start to stabilize. Unfortunately, that’s not been the case.
Over the past few months, the US 10-year yield has been steadily climbing, causing unease in the market.
To add to the uncertainty, Federal Reserve Chair Jerome Powell delivered a rather vague message last Thursday regarding the future of interest rates.
While Powell hinted that rising market interest rates might mean no more rate hikes, a message that was well-received by the market, he also emphasized the strength of the US economy, the tight labor market, and the numerous uncertainties and geopolitical factors that could affect the Federal Reserve’s target of 2%. This mixed messaging appears to have contributed to the recent market downturn.
Powell’s speech may have driven the market, including stocks, downward, as there was an expectation that the era of monetary tightening was coming to an end. However, the prospect of further tightening was now left open, which disappointed many investors. The uncertainty about where interest rates will be in the coming months could be one of the primary reasons for the widespread sell-off of SREITs last week.
Q3 earning season: A reality check
Last week also marked the beginning of the Q3 earnings season for REITs, and the results may have provided a less optimistic picture of the impact of high interest rates and deteriorating market conditions. The performance of some REITs has been disappointing.
The high interest rate environment has caused finance costs to skyrocket in the last quarter. For instance, Keppel DC REIT reported a 0.5% increase in gross revenue, but its distributable income plummeted by 6.5% due to a substantial 57% surge in finance costs. Similar patterns were observed in Keppel REIT and Suntec REIT, where distributable income experienced significant year-on-year declines of 10.1% and 13.3%, respectively.
Indeed, the idea that high interest rates would have an impact was not lost on investors; however, the extent of the impact may have caught the market off guard.
Looming Loan Refinancing Concerns
Another noteworthy factor contributing to the unease in the REIT market is the looming concern of loan refinancing. With the uncertainty surrounding when interest rates might decrease, there’s an added layer of worry, especially for REITs that have fixed-interest loans in their portfolios.
REITs with fixed-interest loans have, until now, benefited from the stability of interest rates, even as they surged. However, the three-year mark is fast approaching, and more and more of these loans will require refinancing at the prevailing higher rates. This impending wave of loan refinancing could potentially have a more pronounced impact on the REITs as we move forward.
Individual REIT Challenges
Lastly, individual challenges within specific REITs have also played a pivotal role in the recent market turmoil. A prime example is Keppel DC REIT, which, despite being recognized for its high quality and resilience, experienced a staggering 15% drop in its share price following the release of its Q3 2023 results.
One major crisis facing Keppel DC REIT is the looming threat of the potential bankruptcy of Neo Telemedia. This situation mirrors what happened to Digital Core REIT when Cyxtera filed for bankruptcy protection, and Cyxtera represented a significant 22.4% of rental income. In the case of Keppel DC REIT, while the percentage is smaller at 11%, it’s still a significant amount.
For some context, Neo Telemedia serves as the master lessee for three of Keppel DC REIT’s data centers. Neo Telemedia has been operating at a loss in recent quarters, and its financial health appears to be in jeopardy, with current liabilities outweighing current assets.
This financial discrepancy suggests that Neo Telemedia might encounter cash flow issues in the near future, which could potentially impact their rental payments to Keppel DC REIT.
Keppel DC REIT has indicated that Neo Telemedia has been meeting its rental obligations, but market fears of a repeat of the Digital Core REIT situation have prompted a sell-off of this particular REIT.
This serves as a valuable lesson for all REITs and investors—while interest rates have certainly been a significant factor, it’s become evident that tenant-related issues could be in the spotlight moving forward. REITs, which lease their properties to other companies, must take into account the financial health and performance of their tenants. If economic conditions do not improve, these tenant-related challenges could become even more impactful.
Adding to the intrigue, two other REITs, ARA US Hospitality Trust and Prime US REIT, experienced notable drops of 8% to 9%, even before reporting their earnings. While significant news surrounding these declines is scarce, they share a common feature—both have properties located in the US, where issues related to occupancy have been observed.
This suggests that these REITs may be facing occupancy challenges in the US market, which have caused investor concern.
Conclusion
All in all, the decline in REIT share prices last week can be attributed to a multitude of reasons. While the overarching theme of persistent high interest rates and a lack of clarity on future reductions has certainly weighed on REITs, other factors have also come into play. The reality of SREIT performance is becoming apparent as Q3 earnings are reported, with tenant-related challenges now taking center stage.
Whether this is a good time to buy ultimately depends on your risk appetite. Many SREITs are currently trading at a discounted valuation, but it’s essential to acknowledge the lingering uncertainties on the horizon. Careful consideration and risk assessment are paramount for those looking to make investment decisions in this dynamic market.
Chris shares more about how he picks the most reliable REITs and dividend stocks to build a reliable dividend portfolio that allowed him to retire early. Learn how from him here.