SINGAPORE REITS: RISKS & UPSIDE

Real estate investment trusts (REITS) listed here with office assets in the United States are feeling the chill amid the downturn in the American commercial property sector.

These fears have also spread to REITS with European office assets, but industry watchers said these assets are more resilient than their US counterparts and should not be viewed in the same light.

There are three US-focused office trusts here – Prime US REIT, Keppel Pacific Oak US REIT and Manulife US REIT. Their unit prices have all plunged since 2023.

Prime US REIT suffered the biggest drop of 45.7%, while Manulife US REIT dove 42.7% and Keppel Pacific Oak US REIT 31.5% in the year to June 9.

This contrasts with smaller falls in the overall sector. The iEdge S-REIT Index, the industry benchmark, fell 2.6% over the same period.

The negative sentiment stems from headwinds in the United States, where office workers continue to largely prefer working from home, making it tougher for companies to decide how much space to lease.Leasing momentum and volumes have slowed since the start of the year, said Vijay Natarajan, a real estate and REIT analyst at RHB Singapore.

Funding also “tightened quite a bit”, he added, with “roughly about 60% to 70% of bank loans for the US commercial real estate sector coming from small, mid-sized banks”.

These banks were caught up in a credit crisis earlier in 2023, leading to huge withdrawals that reduced the capital they had for real estate loans.

Silicon Valley Bank, Signature Bank and First Republic have since been sold to their bigger rivals.

High interest rates also present a challenge for S-REITS with US office assets.

The United States has raised rates by five percentage points since March 2022 to between 5% and 5.25%.

There is expected to be a pause in rate hikes, although there should be at least one more in July.

Prime US REIT and Keppel Pacific Oak US REIT both reported a drop in first-quarter distributable income, blaming it in part on financing costs due to rising interest rates.

Manulife US REIT also highlighted the high interest rates in its first-quarter update on May 11.

The REIT’S manager said it could not sell three assets to reduce its debt because of “interest rate hikes and a lack of financing available for buyers,” although it did recently offload a property in Atlanta to its sponsor, Manulife.

This follows the April sale of a property in Oregon to a subsidiary of its sponsor.

Last week, Manulife US REIT said The Children’s Place, its fifth-largest tenant by gross rental income, would terminate its lease prematurely, ahead of its expiration on May 31, 2029.

The tenant is, however, obligated to pay rent until May 31, 2024, on top of an early termination fee of approximately US$4mil (RM18mil).

Pamela Ambler, head of investor intelligence and strategy for the Asia-Pacific region at real estate services firm JLL, said “default rates in US commercial real estate loans, which include loans to the US office sector, have stayed low”.

She added: “US banks are reluctant to assume ownership of the building if delinquency occurs and, therefore, they will continue to remain engaged and help landlords to refinance a large portion of their existing loans.”

DBS Group property research head Derek Tan said that S-REITS are also “a little bit better positioned” than some of their peers listed in the US because “their source of funds is largely offshore in Asia”.

Tan added that while all three US-focused S-REITS are very attractive because of their high dividend yields, “there is no macro sentiment to drive the share price value”.

Manulife US REIT has the highest dividend yield at 29.5%, with Prime US REIT at 28.48% and Keppel Pacific Oak US REIT at 17.31% as of Friday.

RHB’s Vijay said there may be more volatility in the US-focused S-REITS in the near term, but over the medium to long term, “most of the risks have been priced into the share price”. He added that the stocks are “sitting at a good discount to what their medium-term value is” but he warned that this sector is for the more savvy investor, pointing out that the risk-return profile of US-focused S-REITS differs from those with local assets

SOURCE: ANN