Real estate investment trusts, or REITs, are popular investment choices in the Singapore stock market. That’s because REITs tend to have high dividend yields (technically, a REIT’s dividend is known as a distribution – but let’s not split hairs here!) due to their need to distribute at least 90% of their taxable income to unitholders in order to enjoy tax transparency.
In this article, I will like to discuss two REITs that currently have high distribution yields of over 7% right now. They are: ESR-REIT (SGX: J91U) and CapitaLand Retail China Trust (SGX: AU8U). The duo also happen to be sizeable REITs in Singapore’s stock market, given their market capitalisations of over S$1 billion each.
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As a quick introduction, ESR-REIT invests in industrial real estate, and currently has a portfolio of 56 industrial properties located across Singapore.
For the third quarter of 2018, ESR-REIT reported a 19.4% year-on-year increase in gross revenue to S$32.4 million; net property income improved by 15.0% to S$22.5 million as a result. The REIT attributed its top line growth to contributions from two properties that were acquired in December 2017. Ultimately, ESR-REIT’s distribution per unit (DPU) grew by 4.1% year-on-year to 1.004 cents.
ESR-REIT and Viva Industrial Trust had proposed a merger earlier this year and the deal was completed on 15 October 2018. The aforementioned property-count of 56 for ESR-REIT’s portfolio already accounted for the merger. In ESR-REIT’s latest earnings update, the REIT shared two key benefits that come with the deal:
1) The enlarged portfolio allows ESR-REIT to move towards a self-managed property management model instead of the current model of relying on third-party integrated facility managers. Both ESR-REIT and Viva Industrial Trust were working with the third-party model prior to the merger.
2) The Manager of ESR-REIT has increased flexibility to undertake more asset enhancement initiatives (AEIs) after the merger. This flexibility allows ESR-REIT to optimize the value of its assets while maintaining an acceptable level of risk and distribution payouts. ESR-REIT has already identified up to seven properties for AEI opportunities over the next three years; these opportunities include asset rejuvenation, repositioning, and developing unutilized plot ratios.
In its latest earnings update, ESR-REIT also shared the following useful comments about its outlook and the state of Singapore’s industrial property market:
“Notwithstanding the continuing strength of the PMI and the improved manufacturing outlook, the overall industrial property market remains soft. According to JTC’s market report for 2Q2018, the occupancy rate of overall industrial property market dropped marginally by 0.3% compared to the previous quarter. Prices and rental of industrial space remained relatively stable. Price index remained unchanged while rental index fell marginally by 0.1% compared to the previous quarter. As new supply is expected to taper in the near future, prices and rental may start to stabilise in tandem with occupancy rates…
…Although an increase in enquiries have been noted recently, the Manager [of ESR-REIT] expects the leasing market to remain competitive notwithstanding that demand and supply dynamics appear to be improving as historically high supply levels look to taper off by late 2018. Following the confirmation by IRAS that the disposal gain from the sale of 63 Hillview Avenue would not be subject to income tax, distribution income in future will be underpinned by the ability to payout capital gains. This will help to offset the negative impact on ESR-REIT’s income due to its ongoing and/or future asset enhancement initiatives, asset rejuvenation programs, from conversions from STB to MTB, and from divestments of non-core assets. The Manager will continue to focus on asset and tenant quality and maintaining occupancy given the confirmed challenging leasing market.”
Next up I have CapitaLand Retail China Trust. As a quick introduction, the REIT has an investment mandate to invest in shopping malls in China, Hong Kong, and Macau. It currently has 11 malls in its portfolio that are located across eight cities in China.
The REIT’s latest earnings update, released on 30 October 2018, is for 2018’s third quarter. Although gross revenue for the reporting quarter dipped by 1.1% year-on-year to S$55.35 million, net property income actually increased by 2.2% to S$36.73 million. CapitaLand Retail China Trust’s higher net property income, which was due to a 7.1% fall in property operating expenses, ultimately led to its DPU increasing by 1.7% from 2.37 cents a year ago to 2.41 cents.
Here are useful comments in CapitaLand Retail China Trust’s latest earnings update that describes the conditions of China’s economy and retail environment:
“In 3Q 2018, China’s GDP came in at 6.5% year-on-year under the backdrop of ongoing volatility and uncertainty brought about by the US and China trade dispute. The Chinese economy remains on track to achieve the government’s full year growth target of 6.5%. National retail sales increased 9.3% year-on-year to RMB 27.4 trillion, while national urban disposable income and expenditure per capita grew 7.9% and 6.5% respectively in the first nine months of 20181.
There was an increase in retail space of 1.9 million sqm in 2Q 2018 as international fashion brands and domestic mid-tier apparel and F&B outlets continued to expand strongly. Even with the increase in retail space, overall vacancy rates in 17 cities measured by CBRE tracked lower by 0.3 percentage points quarter-on-quarter to 6.8%.
On 1 July 2018, China reduced import tariffs for daily consumer goods such as shoes, apparel, clothes, sporting equipment, from an average of 15.7% to 6.9%. Import tariff for health and cosmetics items was also reduced from an average of 8.4% to 2.9%. The decline in import tariffs has made daily consumer goods more affordable and allowed the Chinese consumers to purchase more quality products. A second round of import tariff cuts was announced for machinery, paper, textiles and construction materials and will be implemented across 1,585 products
from 1 November 2018, decreasing duties for these products to an average of 7.5% from 9.8% in 2017. This move will further lower the tax burden on consumers and companies with the aim of boosting imports and opening China’s consumer market.
Geopolitical tensions aside, developers remain confident in the domestic retail market with six million sqm of retail space slated to be completed in 2H 2018. Retail space demand continued to recover on the back of the rise of domestic brands, the demand for experiential stores and the increased investments pumped in by venture capitalists. With this robust set of retail sales expectations, CRCT is well-poised to benefit through its portfolio of strategically located malls.”
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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. The Motley Fool Singapore has a recommendation for CapitaLand Retail China Trust.