Singapore’s small and highly-open economy won’t escape the combined weight of the Ukraine war, supply-chain snarls, China’s COVID-19 lockdowns, and a pickup in global inflation. But institutional landlords in the Asian city-state have reasons to be optimistic. Even if gross domestic product grows this year at the lower end of the 3-5 percent official forecast, real estate investment trusts may still get enough juice out of the post-pandemic reopening to keep investors happy amid rising interest rates.
To see what’s making them tick, consider Frasers Centrepoint Trust, a large owner of retail space across the island. By March, its properties were reporting footfall at just about 67 percent of the pre-pandemic average, but tenants’ sales were at 105 percent of the 2019 level. As people previously working from home resume a steady office-going routine, cash registers are starting to ring more often on weekday evenings, and landlords are jacking up rents. According to Frasers’ last quarterly presentation, incoming leases are pricier than the outgoing ones in all its malls except one.
As Credit Suisse Group AG analyst Soekching Kum notes in a recent report, Singapore’s retail recovery from COVID-19-related disruption isn’t fully priced in. For one thing, the city-state’s famous Changi airport is making an all-out attempt to woo customers as Singapore pursues the most liberal policies for visitors in Southeast Asia. International travel has picked up to 50 percent of pre-pandemic levels. The effects of that should show up in shopping by foreign tourists in the second half of this year.
But for landlords, that won't be enough to keep investors hooked. One worry is expensive energy. To absorb higher electricity costs at their properties and yet make the most of the city’s reopening will require REITs to tamp down borrowing costs ahead of significantly higher global interest rates. By March 31, Frasers had pruned its leverage to 33 percent of assets — comfortably below Singapore REITs’ 50 percent regulatory limit — and hedged its debt so that 68 percent of it is now on fixed interest rates, compared with 54 percent in December.
Most of Singapore landlords are similarly hunkering down — and that’s wise. To be able to help their investors beat inflation, REITs will have to stay financially prudent — so that their profits can withstand higher energy and interest costs. That means fewer expensive, debt-funded purchases of new properties, a pause to last year’s $12 billion overseas acquisition spree, and more nip-and-tuck upgrades that boost rental incomes on their existing portfolios. Ascendas REIT, which owns industrial properties, has spent just S$133 million ($97 million) so far this year on logistics assets in Chicago, compared with the S$1.65 billion it spent on M&A abroad in 2021, according to Bloomberg Intelligence.
Landlords of office properties have already benefited from the reopening of the economy. Suntec REIT, which owns a five-tower, 2.3 million-square-foot complex in the heart of the financial centre, has given investors total returns, including dividends, of 15 percent so far in 2022. Credit Suisse says industrial and retail REITs are its favourite picks now because of their “yield buffers and more conservative balance sheets, which provide resilience in a rising interest rate environment.”
Singapore REITS had a banner 2019, when they handed out total returns of 25 percent-plus including dividends. That was followed by a 22 percent slump in the first three months of 2020. This year is unlikely to be as dramatic, but investors aren’t exactly looking for thrills. They’ll be happy if Singapore landlords keep collecting — and distributing — higher rents amid the myriad pressures in the global economy. Not many assets may work this year as an inflation hedge. If property owners in the small Asian city-state prove to be an exception, then they might be much sought after.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Views are personal, and do not represent the stand of this publication.
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