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Difficulty: Moderate

Due to minimum purchase size of S$250k for most SGD-denominated bonds, this article may be most relevant for Priority/Private Bank clients.

Do note that S-REITs trade as units on the SGX and they are technically not the same as stocks. However for ease, we will just refer to them as S-REIT Stocks.

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1) The upside for “S-REIT Stocks” may be limited

2) “S-REIT Bonds” are lower risk alternatives

3) Conservative Investors: Most attractive “S-REIT Bonds”

4) Moderate Risk Investors: Most attractive “S-REIT Perps”

5) Full list of SGD-denominated REIT Bonds

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1) The upside for S-REIT Stocks may be limited

Price-to-Book valuations do not look cheap

The sector’s Price-to-Book ratio stands at 1.07x, compared to the historical long-term average at 0.97x, and post-2008 crisis high of 1.22x (see chart below).

Plus, Book Values are likely overstated

Current REIT Book Values are likely overstated, which also means that Price-to-Book ratios should be higher than what is currently reported, once we make the necessary adjustments. It is mandatory for REITs to revalue their investment properties annually and we note that current REIT book values have yet to meaningfully adjust downwards to reflect where they should be given the recession.

OCBC has highlighted some REITs that have already started making downward adjustments to their property values, according to the research report titled “Singapore REITs – Glass half empty or full?” This can provide some initial guidance on what to expect from peer REITs within the same sector.

• Retail REITs:
  • CapitaLand Mall Trust saw impairments of 0.6-4.2% for its suburban malls, and 1.1-4.8% for its downtown malls.
  • Starhill Global REIT’s retail component of its Ngee Ann City and Wisma Atria properties declined by 0.6% and 5.2% respectively, while its malls in Australia suffered valuation declines of 13.4-24.7% in AUD terms
• Office REITs:
  • CapitaLand Commercial Trust kept its cap rate assumptions unchanged, however valuation for its portfolio declined by 2.0% in Singapore and 1.7% in Frankfurt, Germany.

The InvestQuest’s View: Post the 2008-09 financial crisis, S-REITs have largely traded in the range of 0.9x to 1.1x Price-to-Book. Given that we are at the higher end of that range (while property value impairments are just getting started), we do not see much room for further capital gains in the short-term.

Dividend Yields are already fair at current levels

Dividend yields are currently below historical averages but can be considered a fair level – given the backdrop of record low government bond yields. S-REITs currently trade with a trailing 12-month dividend yield of 4.5%, lower than the 6.1% long-term average yield since Dec-2007.

Sectors that will see steepest dividend cuts

Here are sectors that will see the steepest declines in DPU (dividend per unit) for the current financial year, according to OCBC estimates:

• Hospitality (-58.1% year-on-year)
• Office (-21.4% year-on-year)
• Retail (-12.3% year-on-year)

For the next financial year (FY21/22), OCBC projects a 3.7% increase in S-REIT DPU from last year’s pre-Covid FY19/20 figures. This is slightly optimistic in my view given the negative trend on rental rates, vacancy rates and upcoming new supply of office and industrial space.

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If upside is limited, one can consider REIT Bonds

The InvestQuest’s View: If Dividend Income is the main reason for holding S-REITs, selected “REIT Bonds” may offer a better alternative. REIT Bonds have lower risk than REIT stocks, and provide greater income visibility as bond coupons payouts are prioritized over dividends payouts.

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2A) “S-REIT Bonds” are lower risk alternatives to “S-REIT Stocks”

Bonds are “senior” to stocks

Bonds are “senior” to stocks in the capital structure of a company. This means that in the event of a Corporate Liquidation, proceeds from asset sales will first be used to pay secured lenders (such as banks), followed by bond holders, followed by shareholders.

For this reason, Bonds tend to be much less volatile compared to stocks. S-REIT stocks fell 75% peak-to-trough during the 2007-09 financial crisis. In comparison, the broader Investment-Grade Bond and High Yield Bond markets experienced peak-to-trough declines of 25% and 35% respectively during the same period.

Bond coupon rates are predetermined while a REIT’s dividend per unit (DPU) varies according to distributable income. During a period of economic slowdown, income from bonds offers more stability.

Here is a comparison between REIT Bonds, REIT Perps (which are a bond-like instrument) and REIT Stocks.

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2B) “S-REIT Bonds” are lower risk alternatives to “Corporate Bonds from other sectors”

REITs have a maximum gearing level, which is good for bonds

Bonds issued by REITs tend to have relatively low credit risk. This is because MAS prescribes a regulatory gearing limit of 50% for S-REITs.

• This means that if a S-REIT has $100 of assets, the maximum amount it can borrow is $50.
• It also implies that the REIT’s investment properties have to fall by more than 50% in value, before a bond holder theoretically encounters any principal loss in a liquidation scenario.

REIT sector is currently below that gearing limit

In addition, most REITs do not max out their gearing limit, which provides even more buffer for bondholders. Majority of REITs operate within the 30-40% range.

The current sector gearing ratio stands at 36.7%, which provides a relatively healthy buffer (see chart below).

Bonds from other sectors don’t have such limits

In contrast, bonds issued by Corporates in other sectors do not typically face gearing limit restrictions. You will need to be a lot more selective in such cases, compared to investing in REIT bonds.

S-REITs also frequently equity fundraise, which is good for bondholders

Separately, if a REIT’s gearing limit gets uncomfortably close to the regulatory limit, what tends to happen is that the REIT will issue more shares. This happened during the crisis of 2008-09 (chart below), to the detriment of shareholders. However, such an event would be positive for bondholders!

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3) Conservative Investors: Most attractive “S-REIT Bonds”

Bonds are a lower risk alternative to stocks

For conservative SGD-based investors, REIT bonds are a lower risk alternative to stocks, as demonstrated above.

On the other hand, REIT bonds that mature in 1 – 4 years offer a higher yield than fixed deposits or endowments that currently yield below 2% per annum, while maintaining a relatively low degree of investment risk.

Importantly, coupons from these bonds are NOT deferrable.

For your own portfolio, you’d want to choose bond maturities that match your intended investment tenor. E.g. if you want your money back in 3 years, choose a bond with 3 years left to maturity.

The most attractive S-REIT bonds in our view

1. Keppel REIT 1.9% 10-Apr-2024 (puttable on 10-Apr-2022 at price of 100)
   • Yield-to-put of 3.63%.
   • Keppel REIT is 45% owned by Keppel Corp, which in turn is 21% owned by Temasek Holdings.
   • Note that a puttable bond such as this one, gives the bond holder the option to sell the bond back to the bond issuer on a specified date and price.
2. ESR REIT 3.95% 9-May-2023
   • Yield-to-maturity of 3.51%.
3. Suntec REIT 1.75% 5-Sep-2021
   • Yield-to-maturity of 3.15%.
4. Mapletree Industrial Trust 3.02% 11-May-2023
   • Yield-to-maturity of 2.35%.
   • Mapletree Industrial Trust is 26% owned by Temasek Holdings.

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4) Moderate Risk Investors: Most attractive “S-REIT Perps”

Perps are a lower risk alternative to stocks

For moderate risk investors, some of the “S-REIT perpetual securities” offer a decent balance between risk and return.

Do note that coupons from these perpetuals are deferrable at the discretion of the bond issuer and non-cumulative in nature. You can refer to the table in Section 2.

Earlier we mentioned that the S-REITs are trading at fair to expensive valuations, so existing REIT shareholders may opt to switch to perpetual securities, which are more senior in the capital structure.

The most attractive perps in our view

1. SPH REIT 4.1% Perp (callable 30-Aug-2024)
   • Yield-to-maturity of 4.17% / Yield-to-call of 4.54%.
   • SPH REIT is 63% owned by Singapore Press Holdings.
   • As this bond does not have a coupon reset, it is most suitable for investors who think that interest rates will remain low for a prolonged period.
2. ESR REIT 4.6% Perp (callable 3-Nov-2022)
   • Yield-to-maturity of 3.31% / Yield-to-call of 6.07%.
   • If not called on 3-Nov-2022, Coupon will reset to the prevailing 5-year SGD swap + 2.6%
3. Soilbuild REIT 6% Perp (callable 27-Sep-2021)
   • Yield-to-maturity of 4.44% / Yield-to-call of 10.48%.
   • If not called on 27-Sep-2021, Coupon will reset to the prevailing 3-year SGD swap + 3.79%

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5) Full list of SGD-denominated “S-REIT Bonds”

Highlighted in orange are the most attractive short-dated bonds in our view.

Highlighted in green are the most attractive perpetuals in our view.

• Note 1: Keppel REIT 1.9% 10-Apr-2024 is puttable on 10-Apr-2022 at a put price of 100. This implies a yield-to-put of 3.63%.
• Note 2: Suntec REIT 1.75% 30-Nov-2024 is puttable on 11-Nov-2020 at a put price of 100. This implies a yield-to-put of 1.77%.
• Note 3: On the “Coupon Reset” column, SDSW5 refers to SGD 5-year swap rate which is currently 0.5%, SDSW3 refers to SGD 3-year swap rate which is currently 0.35%.