4 good reasons to invest in S-REITs amidst weak market

REIT managers have learned their lessons post global financial crisis as most now limit their gearing to less than 40%.

Barclays Capital said that while the outlook for Singapore’s office and retail sectors has become more challenging
with the uncertainties in the global economy (especially the office sector, which is highly cyclical and dependent on macro economic growth), it believes S-REITs have become more attractive as investments and are well placed to weather tight operating conditions due to the following reasons:

1. Stronger balance sheets: The REIT managers have learnt the risks of an over-leveraged balance sheet and lumpy credit refinancing during the global financial crisis (GFC) as most now limit their gearing to less than 40% and have taken advantage of the low interest rates and attractive credit environment, post-GFC, to lengthen their debt maturities and better match them to their portfolio duration.

2. Diversified funding sources: REITs now tap a range of financing sources, such as multi- currency medium-term note programmes, convertible bonds, the Singapore dollar bond market, retail bonds and perpetual securities, compared to prior to GFC when the bulk of the financing was through commercial mortgage-backed securities (CMBS) and relatively short-term bank loans.

3. Stronger track record through cycles: SREITs now have a track record of operating across both a bull market (2003 to 2007) and a short, vicious bear market (2008 to 2009). We witnessed most of them prospering across a bull market (2003-2007) and coming through the short, vicious bear market during the GFC relatively unscathed.

Generally, market cap dipped and yields soared as the market priced them to bankruptcy but asset values and earnings have been relatively resilient, proving the resilience of the REIT business model.

4. New value creation strategies: Besides the usual asset enhancement and yield accretive acquisitions, REITs have become more creative in: 1) asset recycling (e.g. CCT divesting Robinson Point, Starhub Centre and acquiring Twenty Anson, and the industrial REITs recently divesting selected properties); and 2) embarking on Greenfield development projects (usually with sponsors) such as CCT participating in the redevelopment of CapitaGreen and CMT in Westgate (up to 10% allowable limit) to enhance returns.