Thursday 5 October 2023

Why It's a Good Time to Buy REITs such as the US REITs

Singapore REITs are at their 52 weeks low. This too is observed for the foreign SGX-listed REIT.

Why are They at Lows?

REIT share prices have an inverse relationship with global interest rates- the higher the global interest rates, the lower the share prices of REITs are. This is because investors will demand a higher dividend yield. Hence prices have to go down for REITs to be priced at a higher dividend yield

Secondly in a high interest rate environment, REITs have to pay more for their interest expense. Hence even if their property revenue grows, it is unlikely their net profits will grow fast enough, therefore dividends stagnate or even fall, hence share prices fall.

Higher for Longer

Central bankers have said interest rates will remain higher for a long time (until end 2024). While interest rates are high, 1-2 more rate hikes are expected from now until end 2024. With rates not going up much, I am of the view that REITs are starting to become a value proposition.

With the inverse relationship of REIT share prices and global interest rates, once 2025 comes, we can expect REIT share prices to go up when interest rates go down. This is why I think REITs are now a good investment class to look in.

Which REITs will Survive until 2025?

Of course, presently a few REITs such as Manulife and EC reit have gone under. However, I would like to caution using the word "go under" or "bankrupt". This is because it is difficult for REITs to go bankrupt. What actually happens is that as they breach leverage and/or interest coverage ratios and then raises money to improve their balance sheet. Therefore the REIT survives but shareholders are severely diluted and will not benefit much from future upside of the REITs. Its only in the REIT occasions where the REITs property value falls 40-50% where property value exceeds loans.This is where the REIT does go bankrupt and shareholders loses everything.

Take for example, Manulife US REIT, it has breached all its financial borrowing ratios. The REIT has not become bankrupt yet, its assets are still higher than its debts; instead it is now looking at cash raising which will dilute shareholders or is selling its properties to protect itself. Shareholders are not going to benefit much from the upcycle.

So which REITs are now good to buy with lesser downside of shareholders being diluted? In my view, it is definitely the Singapore REITs such as Keppel or Capitaland or Mapletree REITs. However, the future upside of these REITs are low as they have not fallen much.

For those considering high risk/high gains, I would say the US Sector is an interesting sector. Unitedhampshire, PRIME, Keppel Pacific US (KORE), Digitalcore REITs have a higher upside along with a higher risk scenario of breaching its financial ratios and need shareholders to fork out cash or sell properties to shore up their balance sheet.

Many of these US listed REITs have leverage ratio above 40% and it is likely they will breach the 45% rule and move towards 50%. The other benefit of US listed REITs is that their properties are freehold which prevents them from suffering of the effects of decaying lease like what Singapore and China REITs suffer from. I have written in the past, where I view Keppel Pacific (KORE) has one of the strongest financial footing and will survive the 1 year plus interest rate storm. I do think a doubling of their share price is possible. 

PRIME on the other hand is more speculative and a minor cash raising is needed to improve the balance sheet. The REIT manager of PRIME is not the best in their class and have a large loan maturing in a 9 months time at the peak of the interest cycle. 

The publication of my posts is solely for informational purposes and is not to be construed as a solicitation or financial advice as I am not a certified financial adviser. My analysis on companies covered are not an offer to buy or sell any stocks and I encourage readers to do your own "due diligence" before investing.


  1. Instead of equity raising, I think if Manulife is liquidated that will be best outcome for shareholders. Nav per share is at least 25-30 cents and current share price is 5-6 cents

    1. Your idea is there. But why would the REIT manager Manulife want to liquidate the REIT. It is earning annual fee managing the REIT while it bleeds shareholders dry. There is a difference in aims among stakeholders unless the rest can force Manulife to liquidate