Why are REITs dropping in Singapore (2023)

Singapore’s Real Estate Investment Trusts (REITs) have seen their stock prices tumble in recent months, sparking concerns among investors. Several key factors are driving the declines, pointing to ongoing challenges ahead for the city-state’s REIT sector.

Rising interest rates globally have dampened investor appetite for REITs. With the U.S. Federal Reserve aggressively hiking rates to curb inflation, the yields on safer investments like bonds and savings accounts are climbing. This has led some investors to ditch REIT stocks in favor of lower-risk options with similar returns.

At the same time, higher borrowing costs have made it more expensive for REITs to fund expansions and acquire properties. REITs tend to rely heavily on debt to finance growth, so increased interest rates can squeeze profits. Debt servicing costs are set to rise further as REITs refinance at higher rates.

Inflation is also battering REITs by pushing up operating expenses. From utility bills to maintenance fees and employee wages, REITs are facing surging costs across the board. This eats into distributable income available for shareholder payouts, making REIT stocks less appealing.

Overseas diversification, long a buffer against local downturns, has turned into a liability for some REITs. With the pandemic having lasting effects in markets like China and Australia, REITs invested abroad have seen property valuations and rents take a hit.

At the same time, mainstay revenue sources for Singaporean REITs face uncertainties at home. Office property landlords are grappling with shrinking footprints as remote work persists. Retail REITs continue to be pressured by the steady march of e-commerce. Defaults and delays in rent collection have already emerged in pandemic-hit sectors like hospitality.

While REITs remain attractive for their high dividends and diversification, the confluence of rising rates, inflation and shifting demand for real estate has investors reassessing their viability. The sector faces a bumpy road ahead as REITs adjust their strategies in response. Some may choose to merge, while lagging players could end up on the chopping block.

For yield-focused investors, the bloom appears to be off the rose for Singaporean REITs in the near term. However, in volatile times, REITs may still hold appeal as an alternative to stocks and bonds. Their inflation-hedging potential via hard assets also bears watching if price pressures persist. But those banking on continued outsized returns could end up disappointed.