Making Sense of Volatility in the REIT Market

Sitting down one-on-one with experts is so valuable for cutting through speculation and getting unfiltered insights. That was my experience in a recent conversation with Kenny Law, a leading REIT analyst based in Singapore.

Kenny is licensed as a Financial Advisor and widely recognised for his analysis of real estate investment trusts (REITs) across Asia. 

On the topic of volatility buffeting the REIT sector, Kenny noted that for the past two years, the Singapore REIT sector really performed quite badly. Some investors grew impatient, wondering if they should liquidate positions.

Kenny counseled focusing on fundamentals. “REITs are essentially real estate investing. You’re investing in physical property,” he explained. Successful real estate investors prioritise consistent rental income over short-term price fluctuations. With a long-term horizon, market swings often correct themselves in time.

What is the key driver of recent turbulence? Interest rates.
Interest rate is the major culprit; Higher rates impact REITs through increased financing costs, lower property valuations from higher capitalisation rates, and difficultly refinancing debt.

The transmission effects clearly. “Your gearing ratio goes up. When you borrow money, there are certain ratios you have to comply with.” This limits the ability to borrow or requires diluting existing shareholders. (It’s no wonder prices fell)

However, rates cannot stay high forever. Most analysts expect cooling inflation to allow rate cuts by 2024-2025. Meanwhile, rising rents from reopening offices and retail will help fill the income gap for well-located assets. “Top line is increasing. Occupancy rate in Singapore commercial office increasing,” Kenny reported.

As the world adjusts to higher rates, REIT strategies are also evolving. Many are focusing on “AEI” or asset enhancements like green building certifications to lift rents and valuations. Kenny cited a potential 7-8% valuation premium for sustainable properties.

Our thoughts? Have patience and perspective during volatile times. Solid real estate fundamentals remain intact under short-term financial fluctuations. For long-term investors, periods of distress often open opportunities. By understanding the drivers of change, we can look past the noise.

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