Singapore’s property market has benefited from unrest in Hong Kong. Local election wins for pro-democracy candidates have failed to take the heat out of protests, which flared again at the weekend. While Hong Kong property investments continue to languish, the combined market worth of Singapore’s real estate investment trusts, or Reits, has risen to more than $110bn.
Collectively, the Reits have returned almost a fifth this year, almost five times Singapore’s equities benchmark. Rental yields, along with Reit portfolio values, should continue to grow.
Steep management and operating fees have deterred some investors in the past. Their reticence now looks like a false economy. A rebound in commercial real estate prices coupled with falling interest rates have been more than enough to offset these costs. Occupancy for Grade A offices in Singapore’s central business district surpassed 95 per cent this year.
Of 34 Reits listed on the Singapore Exchange, shares of the 10 focused on office properties have soared. The stock of Mapletree Commercial Trust, one of the biggest, is up more than 40 per cent this year. Even then, they trade at just 7.7 times trailing earnings, a discount of more than a fifth to Hong Kong peers and below net asset value.
A favourable policy backdrop supports further upside. Reits are exempt from taxes on foreign-sourced income and get a broader tax break if they pay out most of their income through dividends. The vehicles also avoid stamp duty on transfers of local properties. Singapore’s central bank is considering relaxing policy further to make consolidation among Reits easier. The larger the Reit, the more efficient it is. Risks fall while margins rise.
The recent run-up in share prices means dividend yields have come down. But these still exceed 5 per cent, lofty compared with most alternatives. Demand for new central offices should continue to outpace supply, which is expected stay 30 per cent below the past 10-year average, next year. Singapore’s real estate sector will stay a hot property, particularly while tempers are inflamed in Hong Kong.
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