Ride the S-Reits revival via market leaders CICT and CapitaLand Ascendas Reit 

RISING interest rates have roiled real estate investment trusts (Reits). Higher borrowing costs hurt distribution per unit (DPU). Some property values fell because higher capitalisation rates were used in valuation.

Meanwhile, unit prices of Reits declined as investors applied higher discount rates to value future earnings of the trusts or demanded higher yields.

Reits could be a key beneficiary when interest rates soften. An individual parking money in Singapore dollar fixed deposits and Treasury bills (T-bills) will have to find other yield instruments as deposit rates and T-bill yields fall.

Yield-focused investors should consider raising their Reit exposure. Investors might do fine to choose the two largest Reits by market capitalisation, namely CapitaLand Integrated Commercial Trust (CICT) and CapitaLand Ascendas Reit (Clar). Here are some reasons.

One, CICT and Clar offer decent yields. Based on unit prices as at Aug 13 and the annualised first-half DPU, CICT and Clar traded at DPU yields of 5.2 per cent and 5.6 per cent, respectively. The yields represent a spread to the five-year Singapore government bond yield as at the end of Aug 12 of over 230 basis points.

CICT and Clar traded at a discount of about 1 per cent and a premium of around 18 per cent to their respective end-June net asset values, based on unit prices as at Aug 13.

Sure, some trusts offer superior yields or sharper discounts to book values. However, from a risk-reward view, many other attributes support choosing market leaders CICT and Clar.

Two, CICT and Clar are among the seven Reits which are constituents of the benchmark Straits Times Index. The duo are also on various other major indices and widely covered by equity analysts.

As investors’ interest in Reits picks up in a lower interest rate environment, expect funds to largely flow into trusts with good trading liquidity such as CICT and Clar. Conversely, in a crowded Reit space, investors might largely ignore smaller Reits.

Singapore focus

Three, CICT and Clar have substantial Singapore exposure. Physical real estate here could gain from geopolitical tensions and fracturing within and between countries. Drawn by Singapore’s stability and strong ties with many nations, businesses of diverse nationalities seeking to expand in Asia may grow their presence here. Also, the safe-haven premium associated with Singapore properties might rise.

By geographic breakdown, Singapore contributed about 94 per cent of CICT’s first-half gross revenue. Singapore assets accounted for about 64 per cent of the S$16.9 billion of investment properties held by Clar as at end-June. 

Four, an investor in CICT and Clar gets exposure to diverse property asset types. CICT’s portfolio includes downtown retail spaces, suburban retail spaces, office buildings as well as hotels and convention centres. Clar owns business spaces, logistics facilities, industrial properties, data centres and life sciences facilities.

Given their exposure to different property types and number of tenants, problems arising in any one property type or with particular tenants should be largely manageable for the two trusts. 

Moreover, an investor owning CICT and Clar gets diversification as the two trusts focus on different areas. The said investor will be exposed to defensive local suburban malls as well as property segments with strong structural drivers such as warehouses and data centres.

Five, CICT and Clar have robust balance sheets and competitive borrowing costs. As at end-June, CICT and Clar had aggregate leverage of 39.8 per cent and 37.8 per cent, respectively. CICT’s interest cover ratio was three times, while Clar’s was 3.7 times.

As at end-June, CICT’s average cost of debt was 3.5 per cent per annum while Clar’s weighted average all-in debt cost was 3.7 per cent per annum. The ability to borrow competitively helps the trusts bolster DPU. Meanwhile, the trusts are well-placed to manage refinancing risks as they can access diverse credit sources.

Six, given their size, CICT and Clar benefit from economies of scale, which contribute to superior financial performance. Compared with smaller Reits, larger trusts have greater room to keep management, administrative and compliance costs as a share of revenue low. 

Also, a large landlord can better understand the needs of space users and build tenant relationships by virtue of having more data points on tenants, as well as being able to offer them more leasing choices. For example, CICT is a major owner of both Singapore private retail and office space.

In addition, an owner of a large property portfolio has scope to do asset enhancements on particular assets while managing the absence of contribution to earnings from assets that are undergoing upgrading work. 

Seven, CICT and Clar share a strong sponsor in CapitaLand Investment (CLI), which owns the manager of both trusts and is a major shareholder in the duo.

How the duo performs will matter greatly to CLI, which is focused on growing its funds under management. Expect CLI to strongly support CICT and Clar so they can keep their leadership positions.

A strong sponsor can share management know-how with a Reit’s manager and help it develop banking and customer relationships as well as groom staff. Arguably, a Reit that is part of a large group might better attract, develop and retain staff by offering a broad range of career opportunities group-wide.

Eight, CICT and Clar have long track records. Singapore’s first Reit, CapitaLand Mall Trust, debuted on the Singapore Exchange in July 2002 and was renamed CICT in November 2020 following the merger with CapitaLand Commercial Trust. Clar was listed on the local bourse in November 2002.

Through the years, CICT and Clar have generally performed consistently as their managers adroitly navigated events, such as the global financial crisis and the Covid-19 pandemic, as well as bouts of interest rate spikes. Given their track records, expect the managers of CICT and Clar to better manage any disruptions and challenges that may arise over the long term.

As it stands, the managers of both trusts are future-proofing their assets by actively embracing sustainability and championing green practices.

As investor interest in Reits picks up and trust managers fight for investor attention, backing the big boys CICT and Clar could be a winning formula.

The writer owns units in CICT and Clar