Singapore's real estate investment trusts became popular because they had the things local investors love -- steady income, high yields and property. Now, it's all turning upside down, and holders need to hope that a round of consolidation comes to their rescue.
With most annual reports in, the picture for the industry isn't inspiring. Investors may not have noticed. Indicated dividend yields have continued untouched even as return on assets has plunged.
If the REITs are still able to pay out the fat dividends investors expect, it's partly thanks to leverage. The median debt-to-assets ratio of the industry has risen to 36 percent from 31.33 percent.
That's about to become a nightmare. As interest rates rise, investors will demand even higher dividend yields. At the same time, because the REITs owe more, they're more impacted by higher interest payments. Singapore's benchmark rates have been trending up, and while they've retreated from highs reached early last year, they remain more than double the level just two years ago.
Meanwhile, property prices have plunged. That's already taking a toll on profits. Smartkarma analyst Crispin Francis pointed out in a note last week that six industrial-property REITs recognized a collective drop in the value of their assets of S$296.3 million ($208.5 million) in 2016, enough to wipe out all the gains they booked since 2012.
Rents are also dropping, though that's not always clear in the annual reports of the companies. The Urban Redevelopment Authority index that tracks rents for shops in the central region of Singapore is back at the level it was a decade ago, having fallen 11 percent in the past two years.
This all looks dire. The outcome may not be so bad, simply because there are stronger REITs and potential buyers of those very assets, in spite of their dwindling returns. It's almost a rule of thumb among Singapore bankers that once a REIT's shares trade below 70 percent of net asset value, it's just a matter of time before a buyer comes in.
Currently, 20 listed REITs meet that description. Some, like Saizen REIT, are trading at deep discounts to net asset value because they have already agreed to sell their property holdings. Others, like Sabana Shariah Compliant REIT, are studying similar options.
Many investors still have something to look forward to, whether from trusts selling property and paying a fat final dividend or being snapped up by a bigger, healthier firm. One thing is certain, though: The current population of publicly traded REITs in Singapore is unsustainable.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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