SINGAPORE (July 8): Analysts and investors are rediscovering real estate investment trusts (REITs) in the wake of rising uncertainty about global growth, especially after UK's surprise decision to break away from the European Union.
Since June 23, the day of the referendum, the FTSE ST REIT Index has risen 5% compared with a 2.7% gain by the Straits Times Index. The REIT index has gained 8% since the start of the year, compared with a marginal loss by the STI.
REITs are not insulated from weakening economic growth, but they are structured to deliver most of their total return through cash distributions. And, that bond-like quality makes them attractive to investors when interest rates are softening.
However, investors should consider these two types of hurdles before jumping into REITs:
1. Currency risks
While loose monetary policy is making REITs attractive to investors, it is also causing significant volatility in the currency market, which could be negative for REITs with overseas assets. Besides affecting the income that investors receive in Singapore dollar terms, currency volatility could also have a negative impact on the net asset values of REITs.
2. Operational risks
Analysts who cover REITs are bracing for bad news during the upcoming results season, which starts later this month. What is weighing on their performance? Broadly, the problem is rising supply in the face of soft demand as the economy slows.
A possible dark horse among locally-listed REITs is Croesus Retail Trust (CRT), whose unit holders passed a resolution on June 30 for the trust to acquire its trustee-manager, Croesus Retail Asset Management (CRAM), for $50 million.
CRAM’s non-executive director, Jeremy Yong, is determined to see CRT garner a better market valuation, and the strategy he is adopting to make it happen could become the model for the slew of locally-listed property trusts that are not backed by a major property development group.
To read Goola Warden’s full story about the rally in REITs as well as her interview with Jeremy Yong on his strategy for CRT, don’t miss our latest issue of The Edge Singapore (week of July 11, page 16 “Right time for REITs?”), available at newsstands today.