China’s relaxation and subsequent abandonment of its zero-Covid policy signify a momentous turning point for the global economy. Closer to home, this announcement sparks a spell of recovery and optimism for many Singapore businesses. Along a similar vein, new opportunities present themselves as investors seek to uncover the greatest beneficiaries from this turn of events. Singapore-listed real estate investment trusts (S-REITs) are a major component of our local bourse, amounting to approximately 12% of the Singapore Exchange’s market capitalisation .
S-REITs have been and continue to be a popular asset to be included in many domestic investors’ portfolios. They span across a multitude of sectors such as healthcare, hospitality, industrial, office, residential, retail, and even more specific categories like data centres. Indeed, their integral nature in the investment scene demands closer scrutiny as to which of them are best positioned to reap the rewards in response to China’s border reopening.
Intuitively, S-REITs with the greatest exposure to Mainland China are good starting points to explore. There are five such China-focused S-REITs – CapitaLand China Trust (SGX: AU8U), Sasseur REIT (SGXL CRPU), EC World REIT (SGX: BWCU), BHG Retail REIT (SGX: BMGU), and Dasin Retail Trust (SGX: CEDU).
On a year-to-date basis, four of the five S-REITs posted positive returns, with the exception of Dasin Retail Trust[TKX2] . Share prices of S-REITs tend to track their distribution yields given the mandate to pay 90% of profits to investors. China’s reopening will likely lead to increases in footfall, occupancy rates, profit, and distributions. Dasin Retail Trust’s underperformance is attributed to their default on debt repayments which signals a cash flow issue. This encumbered their ability to pay out distributions and thus caused investors’ confidence in the security to erode, leading to a plunge in share price. Overall, REITs with the closest ties to Mainland China properties experienced buoyancy from borders reopening.
Turning our sights to other S-REITs, the most obvious beneficiaries of China’s reopening are those with the closest ties to tourism. 2019 was the last year before Covid-19 ravaged the tourism and hospitality sector. Tourism in Singapore is unquestionably reliant on visitors from Mainland China. In 2019, China was ranked first in terms of visitor count, with over 3.6 million arrivals . More astoundingly was their contribution to tourism receipts , outstripping that of Indonesian tourists (ranked second in tourism receipt) by over 30%. A closer analysis revealed that 49% of this S$4.1 billion in spending was on shopping, with only 17% and 6% on accommodation and F&B respectively. This means that both retail and hospitality REITs are expected to ride on the tailwinds of China’s reopening, with the former being more strongly favoured.
Looking ahead, Singapore Tourism Board forecasts Chinese arrivals in 2023 to reach between 30-60% of the 2019 level. Full recovery to pre-pandemic levels is slated to happen no earlier than 2024. This suggests that the positive effects of China’s reopening on Singapore’s economy and S-REITs will be delayed.
Fortunately, inbound Chinese visitors have already begun to revitalize other segments of Singapore’s economy, such as office spaces. High net worth individuals from China perceive Singapore as an alternative safe haven to Hong Kong in the longer term. Owing to our relative political neutrality compared to Hong Kong, there is ostensibly greater political and economic stability, endowing Singapore with the status of Asia’s rising financial hub. As a result, the number of Chinese family funds skyrocketed from a handful to approximately 600 as of beginning 2023. More Chinese businesses are also registered in Singapore , with plans to use the city as a gateway to venture into other Asian jurisdictions. However, it remains to be seen whether office and residential REITs stand to gain. A more probable scenario is that the arrival of these Chinese businesses and families will contribute to the overall economic health of the city. Their direct influence is perhaps still more pronounced in retail and hospitality REITs.
Even within a particular REIT sector, the magnitude to which each security benefits will differ. Retail REITs which own a large proportion of malls frequented by locals are unlikely to experience positive swings in occupancy rates. Instead, the catalyst that triggered the bump in Chinese tourist footfall and spending has a greater effect on malls which these tourists will patronise.
For example, Starhill Global REIT (SGX: P40U) owns properties such as Ngee Ann City and Wisma Atria which are situated in the centre of tourist hotspots. In contrast, the likelihood that tourists visit malls like Hougang Mall or White Sands – properties owned by Frasers Centrepoint Trust (SGX: J69U) – is lower. Investors may further look at the geographical dispersion of properties. Lippo Malls Indonesia Retail Trust (SGX: D5IU) have retail malls situated entirely in Indonesia. Comparing the various Southeast Asian countries’ share of China visits pre-pandemic , we observe that Indonesia’s 6.4% lagged behind Singapore’s 11.2%. This could imply that REITs holding more tourism-related properties in Singapore are preferred. Therefore, the country composition of assets owned by REITs in the same sector is worth closer examination too.
This type of analysis arguably only skims the surface and more granular assessment can be conducted. An example is the breakdown of shops in a retail mall – are they predominantly F&B outlets or do they mostly cater towards luxury shopping? The hospitality segment consists of more categories like hotels, serviced residences, and commercial apartments. Within each category lies further subcategories like budget hotels vs mid-tier vs luxury hotels. The spending preferences of Mainland China tourists ought to be considered as well.
It is easy to fall into the trap of diving too deeply and missing the big picture. Ultimately, the performance of REITs can be distilled into a few key indicators like net property income and by extension, distribution to unitholders. Regardless of how granular an analysis is, it must translate to results that are quantifiable, relevant, and material. To illustrate, there is limited value in knowing about the profiles of tenants, average daily rate, or revenue per available room, if these figures do not eventually flow to the REITs and unitholders as net property income and distribution payment respectively.
The fifth perspective
There are merits to examining different REITs in several levels of detail. Doing so helps investors better understand the drivers of various industries and how they are linked to macroeconomic fluctuations. At the same time, it is equally important to take a step back and ponder whether these changes eventually lead to numbers that matter to investors such as themselves, who are market participants and thus determinants of REIT share prices.
Final call! Applications to join Dividend Machines 2023 close this Sunday, 26 Feb 2023, at 23:59 hours. If you’re looking for a way to learn how to invest in dividend stocks and REITs and build multiple streams of passive dividend income, then we urge to check out Dividend Machines before it closes. Once the deadline has passed, Dividend Machines will only reopen in 2024. So if you miss this round, you’ll have to wait a whole year before we accept new members again.
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