Singapore landlords don’t fear the global economy

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Singapore’s small, highly open economy will not escape the combined brunt of war in Ukraine, supply chain groans, Covid-19 lockdowns in China and a resumption of global inflation. But the Asian city-state’s institutional owners have reason to be optimistic. Even if gross domestic product grows this year in the low end of official forecasts of 3-5%, real estate investment trusts could still gain enough from the post-pandemic reopening to satisfy investors amid rising rates of interest.

To see what motivates them, consider Frasers Centrepoint Trust, a large owner of retail space across the island. In March, his properties were seeing footfall at around 67% of the pre-pandemic average, but tenant sales were at 105% of the 2019 level. cash registers are starting to ring more often on weeknights and landlords are raising rents. According to Frasers’ latest quarterly presentation, incoming leases are more expensive than outgoing ones in all but one of its malls.

As Credit Suisse Group AG analyst Soekching Kum noted in a recent report, Singapore’s retail recovery from the Covid-19 disruptions is not fully priced in. For one thing, the city-state’s famed Changi Airport is doing its best to woo customers as Singapore pursues the most liberal policies for visitors to Southeast Asia. International travel has reached 50% of pre-pandemic levels. The effects of this should be felt in the purchases of foreign tourists in the second half of this year.

But for owners, that won’t be enough to keep investors hooked. One concern is expensive energy. To absorb higher electricity costs at their properties while making the most of the reopening of the city, REITs will need to lower their borrowing costs ahead of significantly higher global interest rates. As of March 31, Frasers had reduced its leverage to 33% of assets – well below the regulatory limit of 50% for Singapore REITs – and hedged its debt so that 68% of it is now backed by equity. fixed interest rates, compared to 54% in December.

Most Singapore landlords are the same way. And that’s wise. To be able to help their investors fight inflation, REITs will need to remain financially prudent – ​​so that their earnings can withstand higher energy and interest costs. That means fewer purchases of expensive, debt-financed new properties, a pause in last year’s $12 billion overseas acquisition spree, and more upgrades that boost rental income by their existing portfolios. Ascendas REIT, which owns industrial properties, has spent just S$133 million ($97 million) so far this year on logistics assets in Chicago, compared to S$1.65 billion spent on mergers and overseas acquisitions in 2021, according to Bloomberg Intelligence.

Office building owners have already benefited from the reopening of the economy. Suntec REIT, which has a five-tower, 2.3 million square foot complex in the heart of the financial center, has offered investors total returns, including dividends, of 15% so far in 2022. Credit Suisse says that industrial and retail REITs are his preferred picks now because of their “more conservative yield buffers and balance sheets, which provide resilience in a rising interest rate environment.”

Singapore REITs had a banner in 2019, when they handed out total returns of over 25% including dividends. This was followed by a 22% drop in the first three months of 2020. This year is unlikely to be as dramatic, but investors aren’t exactly looking for thrills. They will be happy if landlords in Singapore continue to collect – and distribute – higher rents amid the myriad pressures of the global economy. Few assets could work this year as an inflation hedge. If the owners of the small Asian city-state turn out to be an exception, they could be highly sought after.

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

More stories like this are available at bloomberg.com/opinion