The 2 Worst Performing REITs In 2017

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The Straits Times Index (SGX: ^STI) started 2017 at 2,881 points and ended the year 18.1% higher at 3,403. Yet, this healthy return does not imply that all types of stocks in the local market did well.

Fortunately for investors who like real estate investment trusts, 2017 was a year in which REITs had a respectable performance; in the 12 months ended 8 January 2018, REITs in Singapore’s market had produced a return of around 18%. But this being said, not every REIT had generated good returns in the past year.

This article is the second in a short series which will look at the best and worst performing REITs in 2017. In the first article, I studied three REITs with good returns in the year. In here, I will focus on two REITs that did relatively poorly.  [Editor’s note: The third and fourth article in this series have been published. They are on, respectively, three more REITs that produced good returns, and three more REITs that generated poor returns. They can be found here and here.]

First up, I have Starhill Global Real Estate Investment Trust (SGX: P40U), which focuses on investing in prime retail and office real estate. Its portfolio comprises 11 properties across Singapore, Australia, Malaysia, China, and Japan.

2017 has been a difficult year for Starhill Global REIT. In the quarter ended 30 September 2017, which is the first quarter of its fiscal year ending 30 June 2018 (FY2018), the REIT saw its gross revenue decline 4.1% year-on-year to S$52.98 million. Its distribution per unit fared worse, falling by 7.7% to 1.20 cents.

Singapore is Starhill Global REIT’s largest geographical market, accounting for 63% of its net property income in the reporting quarter. In its earnings release, the REIT had shared useful insights on the conditions of Singapore’s retail and commercial real estate markets.

On the retail real estate market, the REIT said that “Average prime retail rents islandwide in Singapore remained stable, with weakness predominantly in the secondary floors. With continual supply pressure in the coming year, retail rental growth expectations are likely to be modest.” But the REIT did add that “Improvements in retail sales, tourist arrivals and receipts, if they persist, could help to spark some optimism in the retail market over the mid-term.”

On the commercial real estate market, Starhill Global REIT commented that “Grade A core CBD rents rose 1.7% quarter on quarter in 3Q 2017, its first increase in ten quarters, ccording to CBRE. However, modest rental growth is expected over the near term whilst the market absorbs remaining space from the supply surge over the last two years, and the underlying strength of occupier demand remains patchy and uncertain.”

In 2017, Starhill Global REIT produced a total return (including distribution gains) of 11.5%. At its unit price of S$0.765, the REIT has a price-to-book (PB) ratio of 0.83.

Next, I have OUE Commercial Real Estate Investment Trust (SGX: TS0U), which produced a total return (again including distributions) of 11.2% in 2017.

As of 30 September 2017, the REIT has just three properties in its portfolio. These are: OUE Bayfront, a Grade A office building located at Collyer Quay in Singapore; One Raffles Place, an integrated commercial building in Singapore consisting of office towers and a retail mall; and Lippo Plaza, a Grade A commercial building located in the business district of Huangpu, Shanghai.

The first nine months of 2017 saw OUE Commercial REIT generate revenue of S$132.3 million, down 0.4% year-on-year. Its distribution per unit had a larger decline of 11.8% to 3.53 cents.

The REIT’s immediate outlook does not look too bright. In its earnings release, OUE Commercial REIT said that its “rental income in 2018 may be impacted by the full-year impact of negative rental reversions of leases committed in 2017.” And on the conditions of the Shanghai office market, the REIT said that “the overall CBD Grade A vacancy rate may continue to increase in the coming quarters and hence the rental outlook is expected to be soft.”

OUE Commercial REIT has a PB ratio of 0.86 at its current unit price of S$0.74.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.