Singapore is becoming well-known as a destination for REIT IPOs. However, not every REIT is as strong as the next one.
There is a wide variety of REITs available for investors, ranging from country-specific REITs to specialised REITs such as data centre REITs.
Broadly speaking, the REIT universe can be classified into five main categories, namely industrial REITs, hospitality REITs, commercial REITs, retail REITs and healthcare REITs.
As the COVID-19 pandemic drags on, it’s useful to assess which type of REIT offers the safest refuge from the stormy economic headwinds ahead.
Some REITs will find their income generation capability impaired which, in turn, affects its ability to pay out its distribution per unit, or DPU.
Hospitality REITs are, unfortunately, sitting right in the middle of the storm.
As countries go into lockdown mode and borders are shut, air travel and vacations have become almost non-existent.
The situation has had a huge negative impact on the hospitality industry, with hotels and serviced residences reporting sharp declines in occupancy rates.
For REITs such as Far East Hospitality Trust (SGX: Q5T), it will face lower occupancy rates as the number of tourists has fallen off a cliff.
Even overseas hospitality REITs such as ARA US Hospitality Trust (SGX: XZL) are reporting increased booking cancellations and lesser new reservations.
Fortunately, though, the Government has announced a Resilience Budget that should help to mitigate some of the financial burden for these REITs.
Singapore hotels are also being used as quarantine facilities for returning Singaporeans who are suspected of contracting COVID-19, thereby helping to boost occupancy slightly.
Still, hospitality REITs face an uphill climb.
It could take quite a while before everything returns to normal.
In the meantime, DPU is expected to be severely reduced in line with the sharp decline in occupancy rates.
The Singapore Government just announced its latest set of “circuit breaker” measures to contain the spread of COVID-19.
Though malls are not ordered to shut, the new rules state that there should be safe distancing observed, and that dine-in for food and beverage outlets is prohibited.
These tougher measures will drastically lower footfall at the malls, heaping even more challenges to tenants who already face reduced sales from earlier measures.
The Government has also tabled a temporary Bill that will exempt tenants from paying rent to landlords for six months. The move is expected to ease the cash flow concerns for businesses and ensure they do not go bankrupt before the measures are lifted.
REITs are also ordered to pass on rental rebates to their tenants, and many have announced tenant relief packages.
All these measures point to lower rental revenues for retail REITs such as Frasers Centrepoint Trust (SGX: J69U) and CapitaLand Mall Trust (SGX: C38U).
SPH REIT (SGX: SK6U) had already announced a drastic 80% cut in its DPU for its latest quarterly result. There is, therefore, a high probability of retail REITs reducing their DPU in the next few quarters.
Industrial and commercial REITs
Industrial and commercial REITs’ fortunes are tied to the strength of their underlying tenants.
Companies are seeing their revenue and cash flows come under tremendous strain during this pandemic.
Some of the Industrial REIT tenants may not be able to afford to pay rent or may request to defer the payments.
Others, like Keppel DC REIT (SGX: AJBU), are relatively immune due to long locked-in lease periods and stable demand for its assets (i.e. data centres).
The spill-over effect from impending bankruptcies may hit industrial and commercial REITs hard, depending on the spread of tenants they have, the countries they are exposed to, and the industries involved.
In short, investors should expect DPU to get hit. The extent and duration will depend on the specific profile of each REIT.
The most stable and dependable type of REIT during this crisis is likely healthcare REITs.
With assets such as hospitals and clinics that see increased demand during the pandemic, such REITs could even benefit during this crisis.
Because of their resilience, healthcare REITs do not trade at high dividend yields.
These REITs, however, do allow you to sleep peacefully at night.
For instance, Parkway Life REIT (SGX: C2PU), which owns three hospitals and 50 nursing homes in Singapore and Japan, respectively, trades at a dividend yield of around 3.7%.
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Disclaimer: Royston Yang owns shares in Keppel DC REIT.