Bookmark & Share
The Singapore real estate investment trust (REIT) sector is expected to rally in 2017, after it dominated the headlines in recent months with ‘Buy’ recommendations and generally outperformed the broader market index last year, reported Reits Week.
However, the possibility of a large rally may be pressured by the likelihood of mergers and acquisitions (M&As) within the sector, as some investors take a ‘wait-and-see’ approach.
Although talk of possible M&As has been going around since at least 2014, the slowing economic conditions in Singapore has driven the urgency for size.
This is because bigger REITs enjoy greater visibility, scale and prestige.
And with fund managers and investors likely to choose ‘branded’ REITs with larger market caps, smaller Singapore REITs, including some inconspicuous industrial REITs, have been relegated into the investment backwater even as some are trading at below book value.
Rising interest rates are also seen as another factor that could affect a Singapore REIT rally.
Much like the chatter on M&As, rumours on rising interest rates have also been ongoing for around two years now.
And while Singapore REIT managers have taken all the necessary measures to prepare for a high-interest rate environment, unit prices of Singapore REITS are still expected to face further downward pressure as demand for ‘flight-to-safety’ investments weaken, on the back of rising returns on fixed deposits and bonds.
Singapore REITs, particularly those with smaller proportions of fixed interest rate loans and relatively higher gearing levels, are also expected to see interest costs chipping away at distributions.
A weakening Singapore dollar may also stifle a REIT rally.
In 2017, the Singapore dollar is expected to weaken further against major currencies like the USD, JPY and AUS, on the back of tepid economic growth.
Although this bodes well for REITs with properties in these countries, the overall effect of overseas funds and institutional investors lowering their holdings within the sector will offset any benefit gained from the currency conversion.
Finally, the possibility of new REIT listings within the city-state will also smother hopes of significant price appreciations in the sector.
Australia’s Crown Group and Cromwell Property Group are reportedly looking to list their hospitality and office portfolios respectively on the Singapore Exchange.
In the event these initial public offerings (IPOs) materialise, they are expected to further dilute interest and eventually available capital going to Singapore REITs.
Romesh Navaratnarajah, Senior Editor at PropertyGuru, edited this story. To contact him about this or other stories, email romesh@propertyguru.com.sg
Related Articles: