There’s been a change in sentiment for the REIT sector.
Brokerages have now turned more positive on the asset class after many REITs hit their 52-week lows.
Analysts from DBS Group’s (SGX: D05) believe that inflation is set to peak in Singapore soon, resulting in easing cost pressures for the sector.
According to the bank, the distribution yield for the REIT sector remains very attractive at 6%.
Similarly, Maybank Kim Eng maintains a positive outlook on Singapore REITs but warns of risks to DPU as interest costs rise in tandem with rising interest rates.
Brokerage firm UOB Kay Hian (SGX: U10) is also bullish on the local REIT sector due to Singapore’s recent reopening, along with easing inflationary pressures.
With multiple brokerages turning positive on REITs, should investors share their optimism and allocate some money to the sector?
REITs as stable income providers
First and foremost, it’s important to recognise that REITs have been a bastion of stability for income-seeking investors.
The requirement to pay out at least 90% of their earnings as distributions to enjoy tax benefits means that REITs are viewed as dependable sources of passive income.
Non-REIT businesses may ebb and flow with the economy, but REITs have upheld their reputation as reliable dividend payers through good times and bad.
A few examples illustrate this point.
Parkway Life REIT (SGX: C2PU) has paid out higher core distributions since 2008 even though it has gone through both the Great Financial Crisis in 2009 and the pandemic in 2020-2021.
Singapore’s oldest industrial REIT, Ascendas REIT (SGX: A17U), has also continued paying out distributions without fail since its IPO back in 2002.
Another veteran on the scene, Suntec REIT (SGX: T82U), has also maintained its distributions since its listing in December 2004.
Near-term headwinds may persist
REITs have historically continued paying distributions through different economic cycles.
That said, inflation could reduce REITs’ distributable income as their operating costs soar, thus leading to lower overall DPU.
The spectre of more interest rate hikes by the US Federal Reserve will also raise borrowing costs for REITs.
These headwinds could persist for some time and negatively impact DPUs before subsiding either later this year or next year.
Strong sponsors and acquisition pipelines
If you are looking for a REIT that can remain resilient despite the challenges above, it’s preferable to select those with strong track records and sponsors.
These attributes provide the REIT with a better fighting chance to overcome these headwinds.
Some examples of REITs with strong sponsors include Keppel DC REIT (SGX: AJBU), CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT, and Mapletree Industrial Trust (SGX: ME8U), or MIT.
Keppel DC REIT is supported by the conglomerate Keppel Corporation Limited (SGX: BN4).
CICT has CapitaLand Investment Limited (SGX: 9CI) as its sponsor while MIT is anchored by sponsor Mapletree Investments Pte Ltd, a unit of Temasek Holdings.
Not only can these sponsors provide financial assistance to their REITs when times are tough, but they also have a ready pipeline of assets that can be injected to grow these REITs.
A healthy acquisition pipeline means that investors can be assured of steady growth for both the REIT’s asset base and DPU.
Get Smart: Scooping up units on the cheap
By now, you should realise that the REIT sector is resilient against macroeconomic headwinds.
Hence, lower unit prices should be seen as a golden opportunity to scoop up units of your favourite REITs.
Assuming they can maintain their DPUs, you’d be enjoying a much higher distribution yield compared to when they were trading at their highs.
Of course, the key is to select REITs with durable characteristics that allow them to bounce back quickly once the economy is on the mend.
That way, you can enjoy a good night’s sleep.
The brokerages are right to be positive about the REIT sector, but as an investor, you need to tread carefully to avoid value traps.
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Disclaimer: Royston Yang owns shares of DBS Group, Suntec REIT, Keppel DC REIT and Mapletree Industrial Trust.