Separately, Corporate Monitor has extensively researched S-REITs’ capital raisings, including IPO proceeds, and compared them with their distributions over the years. According to the report titled “Return on capital or return of capital?”, Corporate Monitor found that only 10 S-REITs provided a return on capital (R-on-C), that is, they have distributed more money than they have taken in.
The Edge Singapore used to run an annual light-hearted column, “Bankers’ best friends,” at the end of every year, in which we looked at equity and hybrid equity (perpetual securities) raised by S-REITs. However, post-Covid, S-REITs began recycling capital rather than solely tapping the market for fresh equity. This may have been largely due to some investors’ reluctance to fund acquisitions that appeared dilutive to distribution per unit (DPU). Moreover, some preferential offers have not been fully subscribed to in recent years.
The Corporate Monitor report focuses on the manager’s performance and their mediocre performance over the years, which is mainly attributed to the external manager model.
“The key is whether REITs can distribute more than what they raise, which is an indication of REIT managers’ value-add, the report points out.
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It says: “Corporate Monitor is not evaluating the investment return that REITs deliver to unitholders. Such a return is subject to market volatility. What Corporate Monitor measures is REIT managers’ ability to turn equity raised from the market into cash distributions and increase the value of the REIT’s assets.”
The distinction is that the report does not examine returns or total returns as investors do.
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Recap of REITs
To take a step back, when REITs were first introduced in 2002, REITs that own Singapore real estate properties were (and still are) required to distribute at least 90% of their taxable income (generally income derived from such properties) to unitholders to qualify for tax transparency treatment. In addition, REITs investing in foreign properties are also currently exempt from taxation on certain foreign-sourced income from properties acquired on or before March 31, 2020.
As a result of this tax transparency, S-REITs cannot hold retained earnings in their capital structure. Retained earnings account for a large part of a company’s shareholders’ funds, which are tapped for growth. For instance, banks pay out 50% of their net profit, retaining the rest for growth, capital and regulatory capital. As a result of their different capital structures, REITs need to raise capital to acquire properties and grow DPU.
Corporate Monitor has found that 15 S-REITs distributed less than what they raised, which it terms as return of capital (R-of-C).
To gauge whether S-REITs have provided an R-on-C or R-of-C, Corporate Monitor used total value-to-paid-in-capital (TVPI), a private equity and venture capital metric. The formula is the ratio of distributed capital plus remaining capital divided by paid-in capital. At 1 times, the investor has recovered its capital. At, say, 1.5 times, the investment is profitable and has returned 1.5 times the amount invested. At less than 1 times, investors in the fund have lost money.
Similarly, for REITs, a ratio of more than 1 times means the business is creating value, and is a case of R-on-C. A value of 1 times means the business is simply returning the capital that was put in it, “but the owner actually loses due to the time value of money”, Corporate Monitor says. A ratio of less than 1 times means the business is destroying value, because the owner gets back less than what he put in (partial R-of-C).
Corporate Monitor used the traditional TVPI and it also computed changes in net asset value. Hence, its first TVPI comprised total distributions divided by capital raised. The second TVPI comprised total distributions plus changes in net asset value (NAV) divided by total capital raised (see Tables 2, 3 and 4).
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Of the 38 S-REITs, only 10 (slightly more than a quarter) had a TVPI above 1 before the NAV change, which is acceptable performance. The unitholders of these 10 S-REITs have collected more than they invested in the business, and their TVPIs after the NAV change are also more than 1 (see Table 2).
Table 3 (the second bucket) comprises the run-of-the-mill REITs, which have taken in more cash than they have distributed; nonetheless, if the change in NAV is included, they still show a gain. The third group has delivered negative returns to investors across the board (see Table 4).
“Unitholders may be under the illusion that they receive a distribution yield that is much higher than bank deposit rates, Singapore Savings Bonds rates, or T-Bill rates. However, the reality is that they are merely getting back the original capital they invested in such REITs. After factoring in the time value of money, these investors would have lost out as their capital is not generating an adequate return,” Corporate Monitor says.
“For those who invested in the bottom group of 15 value-destroying S-REITs, the picture is even worse as they ended up losing part of their money,” Corporate Monitor points out.
Unsurprisingly, the REITs in Table 2 also rank among the most liquid and preferred by institutional investors.
The Corporate Monitor analysts argue that REITs, which are bond-like, provide lower returns than bonds and point out that 15 REITs “demonstrate a clear case of value destruction”.
New classifications needed
Indeed, some REITs have done better than others. Lee Ooi Keong, one of The Edge Singapore’s columnists, pointed out that four institutional-grade REITs, CapitaLand Integrated Commercial Trust (CICT), CapitaLand Ascendas REIT (CLAR), Frasers Centrepoint Trust (FCT) and Mapletree Industrial Trust (MINT), accounted for 40% of S-REIT market capitalisation.
Lee divided the REITs into four buckets: institutional, selective income, fragile income and distressed. Distressed REITs are not for yield investors, especially retail yield investors.
Separately, The Edge Singapore has used Bloomberg’s TRA function to gauge how the REITs and property trusts have performed since their IPOs. Of the 40, nine REITs have delivered negative total returns since IPO, and a further 22 are trading below their IPO prices after accounting for equity adjustments.
Just four REITs have given investors a double-digit return a year since their IPO. These are CICT, CLAR, ParkwayLife REIT and Keppel DC REIT.
The distressed REIT bucket comprises five REITs. One REIT and one property trust, both with Chinese assets, EC World REIT and Dasin Retail Trust, are suspended. It is unknown if these can be revived. A further three REITs, with US office assets, are also viewed as distressed. Of these, Prime US REIT is making an effort to recover. It is unclear whether Manulife US REIT (MUST) and Keppel Pacific Oak US REIT (KORE) can exit the distressed REIT bucket. At any rate, these REITs should target investors in distressed assets and not Singapore retail investors, market observers have suggested.
Factors affecting REIT performance
Corporate Monitor blames the underperformance of most REITs on Singapore’s external management model. For most S-REITs, the manager is outside the REIT and is owned by a sponsor that also holds a significant stake in the REIT. In Asia, only Link REIT, Asia’s second-largest REIT (CICT is Asia’s largest REIT by market value), is internally managed. Here, management is owned directly by the REIT, with REIT unitholders paying for it.
In the external model, REIT investors pay the manager a fee — much like unit trusts, exchange-traded funds and private equity. In general, the fees are around 50 basis points (bps) on assets, lower than those in private equity. In some cases, where performance is tied to DPU, the underperforming REIT fees are below 50 bps.
An interesting comparison is CICT’s margins compared to Link REIT’s (see Table 5), and CICT’s DPU growth profile versus Link REIT’s. CICT is Asia’s largest REIT by market value, while Link REIT is Asia’s largest REIT by asset size. CICT’s net property income and distributable income margins are higher than Link REIT’s. It is interesting to note that CICT holds back income available for distribution for working capital purposes.
CICT’s main market is Singapore retail and office, which have been stable over the cycle. Link REIT’s home markets, Hong Kong and Mainland China, have faced challenges. This suggests that the property cycle has been an important factor in the performance of these two Asian giants.
“Corporate Monitor is of the view that the external management model, with its inherent conflict of interest, is the main cause for such a dismal situation. Most, if not all, of the REIT managers and business trust (BT) trustee managers are wholly owned by their sponsors. These same sponsors, however, own just a small stake in the REIT or BT (usually 20% or less). Sponsors such as CapitaLand Investment and Keppel prioritise fee income as they pivot towards an asset management business model.”
Vijay Natarajan, vice-president and head of real estate at RHB Bank, disagrees. “For S-REITs, interest costs are the biggest expense item (besides operating expense) and can typically range from three to six times management fees. The fee structure of S-REITs is broadly comparable to that of typical fund management. Although we acknowledge there are scopes for improvements, such as aligning performance fees with DPU growth instead of income, many newly listed REITs have been adopting this,” he observes.
Some REITs have indeed made dilutive acquisitions. For instance, Keppel REIT’s acquisitions of Marina Bay Financial Centre and Ocean Financial Centre were accompanied by income support. Its most recent acquisition — MBFC Tower 3 — was also dilutive to DPU. Since the preferential offer to finance the acquisition, Keppel REIT has not managed to regain its pre-preferential offering price of $1.03 and its preferential offer price of 96 cents.
“This plethora of fees results in S-REITs paying out a significant chunk of their cash, which they could have paid out in distributions. Not only that, but this persistent scenario of having insufficient cash also prompts these S-REITs to regularly raise funds, further depressing their TVPI,” Corporate Monitor reasons.
Of course, not all acquisitions are dilutive. Since 2019, CICT’s large acquisitions have been accretive. For instance, following a full year of a 50% stake in ION Orchard and around four months of rental income from 100% of CapitaSpring, CICT’s DPU rose by 6% in FY2025. Moreover, this pushed CICT’s NPI and distributable income margins above those of Link REIT, which is internally managed, as evidenced by Table 5.
Most REITs aim for DPU-accretive acquisitions. Wilson Ng, senior vice-president and real estate analyst at Jefferies, has calculated that deals for the 10 REITs under his coverage are accretive. “I went to screen for all 71 deals since 2019 and looked at the accretion numbers and the discount to price that the REITs raised money at. Typically, placements were made at a 5% discount to the last close, with preferential offerings at around 10%. The median DPU accretion for all these deals is about 2%.“
Orthodoxy and DPU growth
In general, the orthodoxy is that S-REITs are interest-sensitive vehicles and interest rates are the major lever, both positive and negative for REITs, compared with fees. Interest rates affect REITs in three main ways. First off, REIT unit prices are priced off risk-free rates with a yield spread. Secondly, the highest cost of any S-REIT is its interest cost. Hence, interest rates directly affect S-REITs’ distributable income and their distributions per unit (DPU). The third major impact of interest rates is on the REITs’ assets. Investment properties are valued using discounted cash flow (DCF), income capitalisation, and comparable valuations, all of which depend on interest rates.
Like Natarajan’s, Ng’s view is that interest rate trends affect REITs’ DPU, DPU growth and valuations. “We highlight three key themes, and underpinning these themes is the interest rate outlook, which partly, or at least, has a big part to play. The first key theme we flag is the return of the growth cycle for DPUs in REITs, as seen in recent quarterly results, with DPUs swinging from negative to positive growth. This means the fundamental outlook is very strong and strengthening, which would justify better valuations than when DPU was shrinking, and that hasn’t played out yet. REITs have been underperforming the broader market index.”
After meeting with investors, Ng says: “Investors agree that growth in DPU is coming back, but they also see that return to growth is driven more by bottom line rather than top line drivers. Rent reversions were and remain positive across the board: data centres are at +40% to 50%, office is at +10% and retail is at +5% to 10%. What has really changed has been the cost of debt. The cost of debt typically is about 40% of REIT earnings or DPU.” They are the largest expense for a Singapore REIT and every 10 bps improvement could add around 100 bps to DPU.
According to Ng, historically, Singapore REIT valuations have been closely correlated with the direction of dividend growth — periods of DPU expansion have consistently coincided with tighter dividend yields and stronger total returns. At the same time, flat or declining distributions have weighed on multiples.
DPU-accretive deals are emerging amid lower interest rates. “Sora has been falling, and that is being translated into improving DPU, but not improving share price. Stronger fundamentals not being matched with stronger valuations is a good opportunity and is very positive for the sector. As the upcoming quarterly results come through, I wouldn’t be surprised to see more positive earnings surprises. Cost of debt probably will come in cheaper than earlier guidance, because the REITs’ guidance has been quite conservative,” Ng estimates.
Thirdly, Singapore’s market reforms have improved trading liquidity and valuation multiples across the Singapore equities market. The reforms have driven a huge uplift in valuations and liquidity into the Singapore market, except for REITs. “Talking to the different EQDP fund managers, I sense that most of them are underweight REITs, meaning all the incremental billions of dollars of capital inflow into these equity funds have been flowing into Singapore stocks ex-REITs,” Ng says.
Further out, the CPF Life-Cycle Investment Scheme could provide a tailwind for REIT valuations. “About 95% of our CPF is invested in government bonds, which is quite unusual for a pension fund. The average allocation of pensions globally is around 30% to equities. That is why CPF pension returns are lower than those in other countries. Superannuation funds in Australia can deliver high single-digit returns through the cycle. There is more volatility because you are invested in non-risk-free assets,” Ng explains.
He points to the sector entering a DPU growth cycle for the first time in nearly a decade. “We expect the market to reprice accordingly: as earnings estimates are revised upward and dividend growth becomes more visible, investors should be willing to accept lower yields, driving capital appreciation on top of the income return. We therefore see improving dividend growth not merely as a fundamental positive, but as the key re-rating catalyst for the sector,” Ng posits.
His top pick is CLAR, followed by the next four large-cap REITs: CICT, FCT, Keppel DC REIT and Mapletree Logistics Trust, which turns 21 this month.
On that note, happy 20th anniversary to the six S-REITs in Table 1.
