5 Key Reasons to Invest in S-REITs in 2023

Billy Toh

January 5, 2023

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Singapore real estate investment trusts (REITs) had a disappointing year in 2022 amid the sharp acceleration in the rate hike cycle in the second half of last year.

The rising interest rate environment has led to higher borrowing costs, which affected most REITs globally – not just Singapore’s.

The iEdge S-REIT Index published by the Singapore Exchange, which measures the performance of Singapore-listed REITs (S-REITs), touched 1,136 on 29 December 2022.

That was down by more than 16% from about 1,355 a year ago.

However, following the correction seen in 2022, I believe that S-REITs could offer a more resilient and defensive option for investors this year.

So, here are five big reasons why investors should look to invest in S-REITs this year.

1. S-REITs offer reliable dividends

S-REITs is one of the few asset classes that offers you dependable dividends.

This is as S-REITs are required to distribute at least 90% of their specified taxable income to unitholders in order to qualify for the tax transparency treatment.

With the steady dividend income S-REITs typically provide, they‘re suitable for investors looking for a stable income stream.

There are also quite a few S-REITs that have a strong track record in terms of a steadily rising dividend.

For example, Parkway Life REIT (SGX: C2PU), has been paying out rising distributions for the past 15 years.

When it first listed in FY2007, its annualised distribution per unit (DPU) was at S$0.0632.

It has since more than doubled its DPU to S$0.1408 in FY2021.

2. Average dividend yield of 7.5% is very attractive

Despite the rising interest rate environment, S-REITs’ average dividend yield of 7.5% is still attractive.

The yield is more attractive than the average dividend yield of the Straits Times Index (STI) of 4.0%.

It’s also significantly higher than the 10-year Singapore benchmark government bond yield of 3.1% and Singapore’s core inflation rate of 5.1%.

Source: SGX

3. Defensive in a volatile market

S-REITs can be considered a defensive asset class that is backed by high-income visibility and quality assets.

The portfolio of assets owned by S-REITs usually consists of a mix of conventional and master lease contracts, which assures them of income between three to five years.

This provides stability in terms of income to most S-REITs.

Together with the distribution to unitholders, this will provide a level of stability to investors – even amid market volatility.

4. Protection against inflation

Those investing in S-REITs will also find some degree of protection against inflation in these real estate securities.

In an inflationary environment, rental renewals are usually higher and this will help to boost earnings and distributions to shareholders.

However, there will be somewhat of “lag effect” to the entire portfolio, depending on the timing of lease expiries.

5. S-REITs are beneficiaries of border reopenings

S-REITs are likely to continue to benefit from the return to normalcy as China reopens its international borders on 8 January 2023.

Singapore is among the best-placed countries in this reopening thanks to its track record in the management of the pandemic.

The Lion City was among the first Southeast Asian countries to reopen its international borders, has a high vaccination rate, strong healthcare and social infrastructure.

With the return of Chinese tourists, this will boost the recovery for REITs involved in the hospitality sector.

S-REITs’ distribution yields make them attractive

There is a lot of uncertainty in global stock markets as investors consider the possibility of a recession in the US.

Most market analysts are expecting a mild recession this year with a recovery in the second half of this year.

However, with uncertainty over the prolonged Russia-Ukraine war, the reopening in China and how the rising interest rate environment will affect consumers in the US, most analysts are likely to stay defensive in 2023.

This heightened volatility in the market will make the steady dividends of S-REITs even more attractive.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

About the Author: Billy Toh

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Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.