Dear readers,
The Singapore REITs market is 24 years old this year, with around 14 of them more than 20 years old. In these 24 years, these S-REITs have weathered the global financial crisis, the European debt crisis, a few pre-Covid interest rate cycles, Covid, inflation, the Ukraine War, the post-Covid interest rate cycle, liberation day tariffs and now the Iran War and the adjoining oil crisis. Most of the REITs that were listed before 2010 are trading above their IPO prices, and in these 20 years have more than returned the initial investment in them.
The first REIT to list, CapitaLand Mall Trust, merged with sister REIT CapitaLand Commercial Trust in 2020 to form CapitaLand Integrated Commercial Trust (CICT), currently the largest REIT in Asia. On April 20, CICT announced the proposed divestment of Asia Square Tower 2 and the proposed acquisition of Paragon in the largest transaction for a listed company this year. The size of this transaction at almost $6.4 billion is an example of the maturity of the local REIT sector.
In this REIT Report, we highlight a couple of issues that demonstrate the coming-of-age of the local REIT sector. In an interview with Adrian Chui, CEO of ESR-REIT’s manager, the issue of land lease decay is addressed head-on, introduced by Chui himself as an important part of ESR-REIT’s expanded five-point strategy (see pages 6–7).
Investment properties in REIT portfolios are valued based on their rental income, outlook for rents, occupancy, and land tenure. As land tenure falls below 20 years, discount rates (which are used to compute net present value) and capitalisation rates start to rise. Rents rise to compensate for the declining land tenure, absent which the valuation or capital value of that land starts to decline. This is termed “land lease decay”.
Part of the reason industrial REITs trade at higher yields compared to commercial REITs is that capital return forms part of the yield as land leases decay.
See also: FCT reports higher 1HFY2026 DPU of 6.136 cents
Chui explains that land with 20 years of lease left, hypothetically loses a simple average of 5% of its property value per year until the value becomes zero in its final year. “That’s the depreciation of the land lease but that 5% has the time value of money,” Chui points out. If you take the present value (PV) based on an average discount rate of 7% to 8% for properties with land lease of 20 years or less, the land lease decay works out to be around 3% a year. Hence, if the net property income yield sits at 7%, the 3% is basically a return of capital. This leaves the investor with a resultant yield of around 4%, similar to some Grade-A commercial properties with around 70–80 years of land tenure left.
“Investors see the 7.0% figure as the yield because they are receiving cash in their pocket. They may not fully understand that you’re actually paying yourself part of the 7.0%,” Chui points out.
Our interview with Nupur Joshi, CEO of REITAS, also tackles the topic of land lease decay (see pages 8–9). She highlights the different ways REIT managers actively manage their portfolios to offset land lease decay. These include diversifying overseas to developed Asia-Pacific economies such as Japan and Australia, capital recycling to properties with longer land leases, and redeveloping or build-to-suit a property with a suitable tenant. “In certain cases, JTC is open to granting fresh or extended leases if the asset is redeveloped into a higher-specification facility aligned with future economic needs, typically supported by a clear business case and tenant demand,” Joshi says.
See also: CLCT's net property income for 1QFY2026 down 3.5% y-o-y to RMB282.4 mil
On pages 4–5, we have an interview with Joshua Liaw, CEO of Elite UK REIT’s manager, who spent a couple of years actively managing the portfolio to achieve a total return of more than 70% for the REIT since his appointment in 2023. Liaw is currently converting a couple of vacant buildings in university towns in the UK to student housing. He is also looking for a partner to take over building, managing and owning or co-owning a data centre sited on Elite UK REIT’s property in the seaside town of Blackpool. On Jan 12, Elite UK REIT announced it had received planning permission for a proposed data centre development at Peel Park, Blackpool.
Liaw plans to divest part of the property to the data centre owner/operator. He is fully aware of the heavy capital expenditure required to build and maintain a data centre.
The hidden costs of owning a data centre is the final topic of this issue. In a series of interviews with valuers, auditors, consultants and analysts, we highlight the risks and opportunities retail investors could face when owning data centres in either a REIT or a corporate. Water and power usage, heavy capex, security costs and obsolescence are among the myriad of issues data centre owners grapple with.
Benjamin Chow, head of private assets research for Asia at MSCI, points to the increased specification of data centre fit-out, which has materially raised the development cost per MW. “Data centre developments today are much more capital-intensive than in the past, often requiring billions of dollars of investment and, consequently, much larger equity- and debt-raising exercises,” he says. This is probably why one of the REIT IPOs this year is likely to be AirTrunk’s data centre portfolio that has been passed around a couple of times. AirTrunk was acquired by Blackstone in 2024. There was little surprise when Bloomberg reported that Blackstone plans to package some of these data centres into a REIT in Singapore given the high level of capex and associated depreciation of these assets.
“Some of the new entrants (data centre REIT investors) don’t fully internalise what it means for 75% or 80% of your asset’s value to be depreciating towards zero,” Chow points out.
The experience with Keppel DC REIT has been more positive. This may or may not be the case for AirTrunk’s portfolio. The average retail investor needs to understand the risks of investing in a data centre REIT. “It’s all part of educating people on the different types of assets that they are investing in. REITs, historically, are supposed to have been investing in real estate, and arguably, fitted data centres have always been the domain of infrastructure investors,” Chow cautions.
Thank you for staying with us on this journey.
Goola Warden
