S-Reit investors wary of falling NAVs as interest rates weigh on sentiment

DECLINING net asset values (NAVs) of Singapore-listed real estate investment trusts (S-Reits) are among the top concerns for investors, as portfolio valuations weaken and debt ratios continue to creep up.

Based on data compiled by The Business Times (BT), the managers of 14 of the 27 S-Reits that conducted their annual general meetings (AGMs) over the past month faced questions regarding NAV performance. Unitholders of another six S-Reits voiced concerns over asset valuations.

“We understand why NAV per unit is important to some investors – it is widely associated with the underlying value of a Reit’s real estate assets,” said Morningstar analyst Xavier Lee. “As the value of a Reit’s portfolio appreciates over time, its NAV would grow – all else equal.”

NAV is derived by taking the estimated market value of a Reit’s total assets minus the total value of its liabilities.

When divided by the number of units outstanding, NAV per unit is regarded as a useful guide in determining a Reit’s appropriate traded unit price.

A decline in NAV per unit suggests the value of an investor’s unitholdings should be lower, and vice versa.

In this light, it is no wonder that unitholders of nearly three-quarters of the S-Reits raised questions about NAV or asset valuations at their respective AGMs.

“Falling NAV is one of the things I am watching closely because it will affect the share price,” said independent financial adviser and Reits specialist Kenny Loh.

He noted that Reits with a big drop in NAV – especially those with assets in the United States, Europe and the United Kingdom – have performed poorly.

Of the 22 S-Reits that disclosed NAV per unit figures for the latest quarter ended March, 17 – or over 77 per cent – reported a year-on-year (yoy) decline.

On a quarter-on-quarter basis, close to 74 per cent of the S-Reits that disclosed relevant NAV per unit values posted a drop.

The way Loh sees it, the decline in NAV is “expected” in the current macro environment – as property valuers price in the terminal Fed funds rate into the capitalisation rate.

“In addition, there are very few commercial property transactions under the high interest rate environment, which makes it more challenging for price discovery,” he said.

Morningstar’s Lee agreed that property valuations could be “highly subjective”.

“There is no guarantee that a Reit may be able to divest and capture that entire value reported on the balance sheet,” he said. “When looking at the risk of falling NAV, investors will have to consider if the valuation of the Reit’s underlying assets still holds in the current market environment.”

Lee noted that asset classes or geographies that are more at risk of falling NAV are those that have already experienced capitalisation rate expansion, as well as those saddled with weak market demand and supply dynamics. The capitalisation rate measures a property’s yield, or its income, as a percentage of its asset value.

“The valuation of those Reits with portfolios in Singapore are not affected very much across all sectors,” Loh added. “In general, property in Singapore either has a flat valuation or slight increase in valuation yoy.”

In addition, Maybank analyst Krishna Guha noted that NAVs for some S-Reits with assets primarily based overseas have been negatively impacted by adverse foreign exchange movements.

“We have witnessed declining asset values for offshore assets primarily in the commercial sub-sector,” Guha said.

About a third – or seven out of 22 – of the S-Reits that reported NAV per unit figures in the latest period posted double-digit percentage yoy declines. The majority of these – including EC World Reit , Lippo Malls Indonesia Retail Trust and Elite Commercial Reit – have assets outside Singapore.

“While this is expected given the current macro challenges, the key is to be watchful on whether the trends are mean-reverting or not, and whether circumstances force some realisation of NAV losses,” Guha said.

Analysts BT spoke to were quick to add, however, that investors should not fixate on NAV figures.

“We think that a Reit’s credit metrics are worth paying more attention to under the current high interest rate environment. These would be metrics such as a Reit’s aggregate leverage and interest coverage ratio,” Lee said.

On top of these, Guha said other key metrics to follow are the Reit’s distribution per unit and hedging policy.

“Amid all the negative news, I am watching for the turnaround signs after the peaking of interest rates,” Loh added. “Some of the S-Reits have started on an uptrend and entered into bullish territory based on technical (indicators); the laggards will catch up eventually.”