A Costly Oil Change for Singapore Property Trusts

Low interest rates have obscured the toll the commodity slump has been taking on the city-state's economy.

Rising oil prices may have arrived at just the right time for investors in Singapore's real-estate investment trusts, which are about to start feeling the pain that the commodity slump has inflicted on the city-state's economy.

You'd hardly know it from looking at the FTSE Straits Times Real Estate Investment Trust Index. The gauge is up 10.5 percent in 2016, having reached its highest in more than a year in early September.

Shaky Foundation

Singapore REITs have been on the rise even as rental and property prices have dropped

Source: Bloomberg

Much of the rally is probably due to low interest rates, which buoy the value of real estate trusts, with their steady, bond-like dividend payments. Singapore's benchmark swap offered rate hit the lowest in more than 18 months on Sept. 26 as authorities work to boost a slowing economy.

Leveraged Boost

A drop in Singapore interest rates is probably behind the rise in REIT values

Source: Bloomberg

Take away that boost and the situation is hardly rosy. Rental rates for residential and industrial property have been dropping steadily for at least two years. One bright spot was office space. Yet, since the end of the first quarter of 2015, even that has been suffering. It's no coincidence that the tumble started when the drop in oil prices accelerated.

Fading Grace

Until the first quarter of 2015, office rentals were holding up even as other sectors dropped. Now they have taken a tumble

Source: Bloomberg

* Values indexed to Dec. 31, 2011, for comparability.

The hits have been coming from multiple sides. In the retail space, Wilson Tan, chief executive officer of Capitaland Mall Trust, acknowledged in the company's latest earnings call in July that "we could possibly see rental reversions coming down." The trust is the biggest constituent of the Straits Times REIT Index. Warehouse operator Soilbuild Business Space saw its occupancy rate drop to 92 percent at the end of the first half, from 96.8 percent at the end of last year. 

A string of bankruptcies and debt restructurings in the oil services industry could be about to exacerbate that. Many of the companies closing shop rent offices from real estate investment trusts. The bankruptcy of large players has also had ripple effects. Singapore's classified directory lists 340 companies in the oil and gas sector. Many provide services to bigger firms such as Swiber, the embattled rig maker that's under judicial management.

Whether the recent spike in energy prices will help stop the bleeding, especially in offices outside the central business district, will only become clear early next year, when REITs report full 2016 numbers. Low interest rates or not, don't expect them to be pretty.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at clangner@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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