ESR-REIT property at 23 Tuas Avenue 10. (Photo: ESR-REIT)

‘Buy’ recommendations for Singapore REITs have dominated headlines in recent months, and the sector generally outperformed the broader market index in 2016, including defensive counterparts such as utilities, and telco stocks.

However before you decide to significantly increase your holdings of Singapore REITs, there are some developments on the horizon for 2017 that you may wish to consider before vesting.

Mergers & Acquisitions

Rumours on possible mergers & acquisitions (M&As) in the Singapore REITs sector have been ongoing since at least 2014.

However deteriorating economic conditions in the republic have driven the urgency for size.

Larger REITs enjoy greater operating scale, visibility, and prestige that comes along with bulk.

Fund managers and investors too, are most likely to pick “branded” REITs with larger market markets caps, in the pursuit for passive investments.

These tendencies tend to relegate smaller Singapore REITs, including a number of inconspicuous industrial REITs, further into the investment backwater, despite a number of them trading at below book value.

As such, the likelihood of M&As and consolidations among Singapore REITs has increased for 2017, and this may suffocate any possibility of a large rally in the sector for the year, as some investors take on a ‘wait-and-see’ posture.

Rising interest rates

Like the chatter of impending M&As, talk of rising interest rates has also been ongoing for about two years now, and there are some investors who consider the topic passé.

Some also carry the perception that the market has largely factored in this inevitability, especially given ample warnings from the United States Federal Reserve throughout 2016.

Singapore REITs managers have also, in all fairness, taken the necessary measures to prepare for this high-interest rate environment, such as increasing fixed debt ratio in proportion to overall liabilities.

However unit prices of Singapore REITs will still likely face further downward pressure as demand for ‘flight-to-safety’ investments weakens, given rising returns on bonds and fixed deposits.

Singapore REITs, especially those with relatively higher gearing levels, and smaller proportions of fixed interest rate loans, are also likely to see interest costs chipping away at distributions.

Weaker SGD

Against the backdrop of tepid economic growth, the SGD is expected to weaken further in 2017 against major currencies such as the AUD, JPY and USD.

While this may bode well for Singapore REITs with properties receiving income in these currencies, the overall effect of overseas funds and institutional investors reducing their holdings in the sector, will likely offset any currency conversion benefits.

Give these developments, Singapore-listed REITs will likely see further downward pressure throughout 2017, in line with the republic’s weakening currency.

New IPOs

On top of these factors, there are also lingering talk of new REIT listings in the republic for 2017. Australia’s Cromwell Property Group, and Crown Group are reportedly eyeing listings for its office, and hospitality portfolios respectively on the Singapore main bourse.

Both companies are not able to give any confirmation on these listings when contacted by REITsWeek for this article, but state-owned media outlets in Singapore have carried similar reports on these possible listings since 2016.

Should these initial public offerings (IPOs) materialise, these are likely to further dilute interest, and subsequently available capital going towards Singapore-listed REITs, further smothering hopes for significant price appreciations within the sector in 2017.

By Ridzwan Rahmat

Ridzwan has been analysing REITs and business trusts since 2008, and personally manages a portfolio comprising mainly of SGX-listed REITs. He founded REITsWeek in 2013.