The COVID-19 pandemic is a once-in-a-century event, bringing about far-reaching effects on a global scale, disrupting lifestyles, businesses, international supply chains and travel.
The Straits Times Index (STI) fell 24% in March 2020 and Singapore’s GDP contracted 5.4% for the year. Likewise, Singapore REITs were among the hardest hit — the iEdge S-REIT Leaders Index crashed 29% in March last year as the pandemic worsened and Singapore experienced its first lockdown.
But the effects of COVID-19 impacted — and will continue to impact — each Singapore REIT sector differently. And will the recent Phase 2 (Heightened Alert) measures bring Singapore REITs back to square one? In this article, we look at the longer term trends and developments investors need to be aware of for each REIT sector.
COVID-19 has changed consumer purchasing and consumption habits. With travel restrictions in place, domestic shoppers have increasingly adopted online purchase of products and services as well as turning to local purchases. Malls located in suburban areas and transportation nodes whose focus is on essential goods and services remain relevant.
Data from the Singapore Retail Sales Index show that the overall proportion of online retail trade (excluding motor vehicles) increased year-on-year by 5.1 percentage points to 12.6% in December 2020.
For the same period, the proportion of online sales for computer and telecommunications equipment grew significantly by 7.4 percentage points to 35.2%. Furniture and household sales increased by 11.1 percentage points to 23.4% while the proportion of online supermarket and hypermarket sales have risen by 3.3 percentage points to 11.8%.
Since last year, retail malls have accelerated the implementation of e-commerce capabilities through the expansion and upgrade of digital channels. However, the retail experience cannot be entirely replicated online. Therefore, how retailers combine physical and digital offerings through omni- channel retail could be the differentiating factor moving forward.
The recovery for the retail market is expected to be a long-drawn process and largely dependent on current social distancing measures and opening of borders, especially for city malls which count a higher proportion of tourists for their shopper traffic.
In the long run, a well-managed REIT with a portfolio of well-located malls that offer the right mix of stores, food establishments, and unique retail experiences is likely to do fine in a post-COVID world.
“Ultimately, the success of retail REITs depends on how well-located and well-managed their malls are. While short-term hiccups may occur, high quality malls will always be able to attract new tenants and keep shoppers coming back.” — Richard Yeh, Head of Portfolio Construction and Risk Management, Syfe
COVID-19 has changed the future of office spaces, with companies now reviewing their working models and arrangements. On the ground, one can sense a shift towards a more flexible work-life environment. In decentralised locations (outside the CBD), one can see an increase in the working population’s usage of integrated developments that are well-connected to an immediate residential catchment featuring open spaces which comprise a diverse mix of public amenities, retail, and F&B.
After three quarters of negative net absorption, the Singapore office market registered a positive net absorption for Q1 2021. The Grade A office market, in particular, is expected to remain in demand as tenants capitalised on declining rents and moved to prime office buildings. The research also indicates that CBD Core remains the preferred location for sectors like technology, financial services and banking and legal firms.
As a result of this ‘flight to quality’ from Grade B to Grade A offices, Singapore REITs that own a portfolio of Grade A office properties are likely to fare better than their Grade B counterparts.
The pandemic has redefined future office demand and working spaces. As companies gradually phase their return to offices, some occupiers are reviewing their locational preferences and working models. Emerging trends such as the ‘hub-and-spoke’ model which is based on flexible workspaces and working styles are also expected to support demand for business parks.
In the long run, we are likely to see a hybrid of at-home and in-office work as the office will continue to play a critical role in fostering company culture and staff engagement.
Following the global travel restrictions and border closures amid the pandemic, hospitality is arguably the REIT sector to bear the worst of the pandemic.
Visitor arrivals in Singapore in 2020 fell to the lowest record in the last four decades, witnessing an 85.7% drop to 2.74 million, compared to 2019. CBRE expects Singapore hotel occupancy to start improving in 2021, while IATA predicts that travel will only return to pre-pandemic levels in 2024.
At the same time, hospitality REITS have seen longer-stay properties cushion the impact of the absence of international and transient travellers. To mitigate near-term headwinds faced by the traditional hospitality asset classes, major players have moved to expand their asset allocation in longer-stay properties such as student accommodation, serviced residences, and rental housing properties to enhance income stability.
However, tourists and hotels remain the bread and butter of the hospitality industry, and without a large domestic market, the timing of when international borders reopen remains key to the recovery of Singapore’s hospitality REIT sector.
Vaccination rates around the world will play a critical role in the reopening of international borders among countries. As of writing, 14.9% of Singapore’s population is fully vaccinated and 23.9% have at least received one vaccination dose.
While the global tourism situation still looks uncertain in the interim, travel is an experiential product that cannot be replaced and there is likely to be large pent-up demand when international borders reopen. Singapore’s position as a safe, attractive leisure and business destination will support the medium to long-term prospects of the tourism sector.
The industrial sector is a beneficiary of long-term structural trends such as e-commerce, data centres, and automation. According to a research report by Google, Temasek and Bain, as consumers and SMEs continue with online migration, digitization of businesses will accelerate and expand cross-selling opportunities across platforms. Online consumption in Southeast Asia is estimated to cross US$300 billion by 2025.
Within industrial assets, logistics properties proved to be resilient, with rents returning to pre-pandemic levels at the end of 2020. Industrial REIT players have reported an uptick in demand for space at logistics and warehouse properties, driven mainly by government stockpiling; as well as third-party, e-commerce and food logistics players who saw a surge in consumer demand.
Data centres are another industrial subsector that has benefited as more people increase their digital consumption and adopt new digital habits (e-commerce, food delivery, etc.) due to lockdowns.
The Southeast Asia data centre market is projected to grow 12.9% annually until 2021 and Singapore is among the top 10 data centre markets in the world due to its advanced infrastructure and protection from natural disasters.
With Singapore having rolled out its 5G plan in January 2021, the outlook for Singapore’s industrial sector looks positive, with both the electronics and biomedical sectors poised to see sustained output growth. As the economy gains a stronger footing, demand for business park spaces designed for bio-medical research & development, technology, and e-commerce could also increase.
As a healthcare crisis, COVID-19 has helped the financial performance of the healthcare sector. However, the pandemic will eventually ease and it’s important to look at the long-term underlying factors for healthcare demand when considering Singapore healthcare REITs.
By 2030, 25% of Singapore’s population will be aged 65 and older, compared to 14% today. Life expectancy in Singapore is also projected to reach 87.28 years by 2050, up from 83.80 years today.
In the past decade, Singapore tripled its healthcare expenditure from S$4 billion a year in 2010 to about S$12 billion in 2019. The jump is attributed to Singapore’s ageing population, increased use of healthcare services, and trends towards earlier diagnosis of conditions, closer monitoring, and follow-ups.
In the near term, the Singapore government budgeted S$18.8 billion to cater for the growth in patient subsidies and opening of new facilities in 2021. The higher budget also considers the continued funding and contingency provision for the prevention, containment, and control of COVID-19.
Among the REIT sectors, healthcare REITs continue to offer one of the strongest earnings visibility, delivering resilient growth among S-REITs. Healthcare REITs are likely to continue to see steady growth due to increased spending in medical care. However, a REIT still needs to be well-managed as seen by the differing performance of two healthcare REITs listed in Singapore: Parkway Life REIT and First REIT.
The fifth perspective
Since the March 2020 lows, the iEdge S-REIT Leaders index rebounded 29% by end-2020, while the STI recovered 19% in comparison. This speaks to the resilience of the broader REIT market in Singapore. Despite the recent volatility, this should ease investor uncertainty as Singapore re-enters a heightened phase of COVID-19 measures. Singapore REITs survived and, subsequently rebounded, when the pandemic first hit our shores; they should hold up well again this time around.
Among the REIT sectors, recovery of the retail and hospitality sector is expected to undergo more uncertainty as full recovery is dependent on the relaxation of social distancing rules and the reopening of borders. The office sector continues to undergo changes with a noticeable shift towards integrated works spaces and business parks, while the industrial and healthcare sectors have displayed stability and resilience amidst the ongoing pandemic.
Despite the uneven recovery among the different sectors, one trend is starkly evident: COVID-19 has brought about an acceleration of digital adoption and digital consumption. As such, investors should continue to monitor the digital transformation that could influence the business operations and performance of the various REIT sectors. REITs that adapt well to evolving structural trends remain a solid choice for dividend investors.
In the interim, Singapore REITs continue to remain attractive for investors seeking passive income and dividends. Singapore REIT yields should remain stable as REIT managers have factored the short to mid-term cash flow impact of the pandemic since March last year. Likewise, reported earnings look resilient for the quarter ending March 2021, with an average reported DPU growth of 37.4% sequentially across the REIT sector, a sharp recovery from -17.5% year-on-year in 2020 during the pandemic.
Moving forward, we can expect long-term distributions to recover and surpass pre-pandemic levels as the world eventually emerges from the cloud of COVID-19 and economies rally.
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This article is written in collaboration with Syfe.