- S-REITs’ geographical diversity a doubled-edged sword in periods with heightened volatility in currency movements
- Possible risk to currency fluctuations limited to an average of -1.7% and well mitigated through hedges – a better outcome than anticipated
- Strong SGD a draw for S-REITs as a safe haven trade
Geographical diversity is a double-edged sword. Singapore REITs (S-REITs), with Singapore considered a global REIT hub in Asia, have presented diverse choices to investors looking to efficiently invest in the listed real estate space. Total assets for the S-REITs were c.S$185bn – c.53% of that is in Singapore, with the remaining 47% in key gateway cities globally. In terms of exposure, Australia (10% of assets), USA (c.9%), China (8%), and Europe (6%) are the largest foreign jurisdictions that the S-REITs are invested in, amongst others. While this geographical diversity benefited the S-REITs by fueling an acceleration in growth, heightened currency volatility in 2022 has led to investors questioning the sustainability of FY22-23F S-REIT yields (5.9%-6.3%), especially for the more diversified and foreign-focused S-REITs, given that forex translation effects may have an impact on distribution, as these are mainly paid for in SGD.
Risk of erosion in DPUs from translation losses is overplayed. The SGD has been a safe haven in 2022 and has appreciated against a basket of currencies (+3% to +8%) that the S-REITs have exposure to, except for the USD (-3%). While this has brought capital inflow for the S-REITs as SGD proxies, we remain comforted that the risk of a significant erosion due to translation losses is overplayed, especially when most S-REITs (especially the geographically diversified ones) have hedged in most of their foreign-sourced incomes by up to 12 months or more. Even if currency pairs remain at the current levels, downside risks to DPUs are c.1.7% on average, which, we think, is manageable for most. In addition, we like the S-REITs’ conservative capital management strategies, given that its balance sheets are naturally hedged, limiting the impact of translation movements on NAV and gearing.
Focus on re-opening. We remain constructive on the S-REITs and believe that the sector remains a “safe haven” trade in the midst of market uncertainty. With “noises” arising from currency and interest rate impacts on distributions addressed, we remain comforted by our FY22-23F DPU CAGR of 6.0%. We continue to like growth over yield, with preferences in office (KREIT, CICT) and hospitality (ART, CDLHT), and selected growth names in retail (FCT, LREIT) and industrial (FLT, MINT).