Is It A Good Time To Go Into REITs?

With cuts to the interest rates happening, many investors expected that real estate investment trusts (REITs) would see their heydays coming again, after being in the doldrums for much of the past two to three years. Alas, this was not to be. In fact, if you look back even further, Singapore REITs (S-REITs) have yet recovered to its pre-COVID levels, according to the iEdge S-REIT Index (Figure 1).

 

Fig.1: 5-year iEdge S-REIT Index (Source: SGX as of 23 Nov 2024)

By now, if you had noticed that the title of this blog post sounded familiar, you are correct. I had asked (more or less) the same question back on 30 Aug this year, and it is kind of a déjà vu asking it again. If things are on a bargain for quite some time, it does not bode well as their values are seen as stuck without any potential for price appreciation. Or is it?

On a macro scale, several factors contribute to this wave of S-REITs downtrend, but for me I see the two main ones are the incoming U.S. president’s geopolitical and economic policies which are viewed as inflationary in nature (and thus bringing back higher rates, a bust for REITs), and the continued narrative of falling distributions of past quarters. Therefore on the whole, the REITs asset class was dragged down by these concerns, whether will they come to fruition or not.

In addition, as I had mentioned here before, the effects of a lowered interest rate would not be felt immediately but rather at least a couple of years, so there is some “interest pain” felt in the form of costs of borrowing during this phase.

Now back to the question: is it a good time to go into S-REITs?

As usual for my answer, it depends.

Since in general the S-REITs were dragged down as a whole, including those that are deemed fundamentally good ones, which includes having low gearing, resiliency of their properties and potential for higher rental reversions, to name a few. If you are not able to identify which REITs to go for, or going after individual ones is not your penchant, then going for or averaging down on REIT exchange traded funds (ETFs) is another way.

While in general the markets are rising (equities, gold, and yes, Bitcoin) thanks to whom we know will be the next U.S. president, there are still opportunities in other asset classes (like REITs), sectors and industries that are facing a setback. These are the Mondays to look out for to buy in (intelligently, of course), and they would eventually become Sundays again in due time.