S-Reits beat other Reit markets with 20% returns year to date

Singapore

SINGAPORE-LISTED real estate investment trusts (S-Reits) have outperformed other Reit markets year to date, raking in about 20 per cent in total returns so far this year, but the managing director at Goldman Sachs Asset Management's fundamental equity team attributes this to "price discovery".

Collin Bell told The Business Times in a recent interview that this outperformance comes after Singapore "massively underperformed" in the past two years, due to oversupply in various sub-sectors, along with more tepid economic growth expectations which affected leasing demand.

"Part of that is just price discovery, that is prices have just gotten so cheap that investors now are buying them again. Part of it is in the view that they are largely discounted in their valuations today, and that economic prospects have improved marginally in Singapore, and you have also seen some easing of (housing) policy here," Mr Bell said.

Hong Kong has also returned about 20 per cent this year, while Continental Europe has returned about 13 per cent.

The big underperformers this year have been the United States and Japan, but this is largely due to fears of rising rates in the US, challenges in the retail sector and supply concerns in Japan.

"It is just that the valuations are full in the US, and that is the market where interest rate risks are most pronounced at the moment. If you think about it, outside the US, most countries are still on an easing mode, so they have a more attractive financing environment underpinning their values," Mr Bell said.

The same goes for Japan's Reit market, which has enjoyed an exuberant performance thanks to low rates in the past few years on the back of Prime Minister Shinzo Abe's aggressive easing initiative.

Asked where he sees the most growth potential in the global Reit space, Mr Bell said: "Right now, we like hotels, particularly in the US. Part of the reason is because they are the most economically sensitive part of the commercial real estate story, and the lease term is only a day, so that mark-to-market is pretty quick."

He also believes that the magnitude of the threat that Airbnb poses to the hotel sector has been hugely overstated, which has led the sub-sector to trade at "meaningful discounts" to the broader market.

He is also overweight on suburban retail in Asia, by which he means shopping centres that sell necessity goods, which is one segment that he feels will remain quite sheltered from the effects of e-commerce.

"In the market right now is this discussion about clicks versus bricks. We think the threat of Amazon and how online spending is threatening brick-and-mortar retail is a little bit misplaced. . .

"The magnitude of the threat (of e-commerce) is varied. It's a much bigger threat in the US than it is outside the US, because if you compare to Asia, the department stores per capita in the US is roughly three times that in Asia."

And many of the retail stores in the US are suffering because they are selling products that are easily saleable online. In the US, there is twice the amount of exposure to this category of tenants than in Asia, he said.

He remains confident in the prospects of grocery-type shopping because statistics show that groceries make up only about 2-3 per cent of items bought online, given the challenges of distributing perishable goods and consumers' preference to see and touch them when buying such items.

Mr Bell is also bullish on for-rent apartments in the US, on the back of an improved economy and wage growth.

"What we are seeing is a generational change happening at the millennial level, where a lot of people who graduated into a soft economy and could not get employed and used to live with their parents or from the couch of a friend - now the first thing they do when they get a job is to go out and rent a place," he said.

"Millennials are also getting married later, pushing off big life decisions with respect to marriage and having children, which in turn is keeping them longer in the rental story. There is an increased push to rent rather than own, and that is something you see in the car industry with Uber, in the music industry with Spotify. The same thing could be said with housing."

Asked what he is cautious on, he said London offices, which are seeing softer demand prospects after Brexit, amid increased supply.

"We were cautious on Singapore but have now assumed more of a neutral view on it," he said, adding his firm's strategy includes a number of S-Reits with some overseas exposure.