Yahoo Finance Are REITs A Good Investment for 2023?
As 2023 rolls in, many investors will remember 2022 as a washout one for the REIT sector.
A toxic combination of high inflation and rising interest rates has greatly dampened demand for the asset class.
REIT unit prices have tumbled across the board, even for stalwarts with strong sponsors and good distribution per unit (DPU) track records.
Mapletree Industrial Trust (SGX: ME8U), or MIT, saw its unit price tumble 17.7% year to date.
Both Keppel DC REIT (SGX: AJBU) and Parkway Life REIT (SGX: C2PU) have fared worse, with their unit prices falling by 23.5% and 25.3%, respectively, year to date.
With pessimism extending into next year, are REITs still a good investment for an income-seeking investor?
Mandated to pay out dividends
First and foremost, let’s not forget that REITs are structured as dividend-paying instruments.
It is a requirement for all REITs to pay out at least 90% of their earnings to enjoy tax benefits.
Hence, REITs will continue to act as good dividend investments as we usher in 2023.
What’s more, some REITs, such as MIT, Suntec REIT (SGX: T82U) and Mapletree Logistics Trust (SGX: M44U), or MLT, pay out quarterly distributions.
Investors in such REITs can enjoy a steady stream of passive income every three months.
Buffering against higher rates
Rising interest rates are a threat, but well-managed REITs are far from sitting ducks.
The best of the lot have smartly hedged their loans at fixed interest rates, thereby mitigating a sharp rise in finance costs.
By doing so, they can help to protect against a sudden decline in distributable income that will crimp the REIT’s DPU.
For MIT, 74.2% of its borrowings are hedged while the REIT still enjoys a low cost of debt of 2.9% as of 30 September 2022.
Keppel DC REIT also has nearly three-quarters of its loans on fixed rates, with a cost of debt of just 2.3%.
Retail and commercial REIT CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT, has hedged 80% of its borrowings on a fixed rate along with a cost of debt of 2.5%.
With the bulk of their loans on fixed rates, these REITs should not see a large drop in their DPU.
Acquisitions to the rescue
Just like any other company, REITs also seek to grow their asset base steadily over time.
To this end, many of them have carried out yield-accretive acquisitions to help grow both their assets under management (AUM) and DPU.
Acquisitions are, therefore, a viable way for many REITs to offset the decline in their DPU when next year rolls by.
MIT, for instance, has quadrupled its AUM over the last 11 years, going from S$2.2 billion in fiscal 2010/2011 (FY10/11) to S$8.8 billion in FY21/22.
Over the same period, the REIT’s DPU has also grown from S$0.0841 to S$0.138.
MLT’s acquisition track record has also been impressive.
For FY21/22, the logistics REIT undertook seven acquisitions in total, helping to lift its DPU by 5.5% year on year from S$0.08326 to S$0.08787.
Keppel DC REIT has also conducted an acquisition of two data centres in Guangdong, China, that will help lift its DPU by 2.7%.
These moves are helpful to buffer against the higher interest rate environment.
And with strong sponsors in Mapletree Investment Pte Ltd and Keppel Corporation Limited (SGX: BN4), MIT, MLT and Keppel DC REIT should enjoy a healthy pipeline of assets for future acquisition.
Organic growth
Let’s also not forget that REITs can also grow their rental income, and by extension, DPU, through a variety of organic methods.
These methods include asset enhancement initiatives (AEIs), redevelopments, positive rental reversions, and rental escalation clauses embedded within tenancy contracts.
A recent example is CICT’s AEI works at Clarke Quay to turn it into a “day and night” destination.
Costing S$62 million, these works are set to complete by the third quarter of next year.
Meanwhile, MLT has reported an average positive rental reversion of 3.5% for its latest quarter.
CapitaLand Ascendas REIT (SGX: A17U) is one of the most active REITs when it comes to acquisition and organic growth.
For its latest quarter, the industrial REIT announced S$296.7 million in proposed acquisitions in Singapore and a total of S$622.4 million in ongoing projects including redevelopments and AEIs.
To top it off, Singapore’s oldest industrial REIT also announced a positive rental reversion of 5.4% for the quarter.
Get Smart: Stick with the best
It’s official.
REITs will continue to be relevant even with the headwinds that we see going into 2023.
However, it’s important to stick with the best REITs in the market to avoid disappointment.
There may be short-term pain but if you invest in the best, you will enjoy long-term gains.
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Disclaimer: Royston Yang owns shares of Keppel DC REIT and Mapletree Industrial Trust.
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