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Only investors in the largest REITs fared better than bank deposits

Tong Kooi Ong & Asia Analytica
Tong Kooi Ong & Asia Analytica • 8 min read
Only investors in the largest REITs fared better than bank deposits
The Absolute Returns Portfolio also ended lower last week, down 1.9% with all stocks closing in the red. Last week’s losses pared total returns since inception. Photo Credit: Bloomberg
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Real estate investment trusts (REITs) are generally seen as fairly defensive investments, their primary attraction being their ability to provide investors with steady annual distribution income (dividend) streams — and, for many, they are the preferred alternative to fixed deposits.

These investors are willing to take a bit more risks (FD in banks is risk-free) for the prospect of higher returns. Have REITs lived up to this expectation? To answer this question, we analysed the long-term performances for REITs listed on Bursa Malaysia (Malaysia REITS, or M-REITs) and the Singapore Exchange S68 -

(SGX) (Singapore REITs, or S-REITs).

For better clarity and more useful comparison, we divided them into the largest, mid- and smaller-sized REITs (by market capitalisation) for both exchanges (see Table 1).

From January 2015 to April 30, 2024 (about 10 years), the largest and mid-sized M-REITs and S-REITs delivered positive compounded annual total returns, on average — from capital appreciation plus dividends (assumed reinvested in the shares). But investors made losses on one-third of all the REITs, the smaller-sized REITs, over the same period, even after taking into account dividends. The median loss for M-REITs is 4.2% per year, while that for S-REITs is 1.3% (note, that is negative returns per year for the past 10 years).

Notably, when compared against the compounded annual returns from bank FDs, only the largest REITs delivered material positive differences. The median compounded total return for the largest M-REITs over FD is 3% per year and for S-REITs, it is 3.7%. In other words, only investors in the largest REITs fared better than simply leaving money in the bank, at no risk, over the past decade. And investors in S-REITs obtained higher excess returns. This conclusion should give REIT investors pause. Clearly, not all REITs are created equal or perform equally over time.

See also: 5G evolution and pinky promise: Back to the past, except worse …. Why?

Perhaps more importantly, the total returns for M-REITs in US dollar terms were more than halved because of the ringgit’s depreciation. As a result, they were significantly lower than that for S-REITs, given that the value of the Singapore dollar held up much better against the greenback over the period.

Here is the key takeaway: We believe that one should take a more global view when it comes to investing, in order to optimise returns. After all, trading on any of the multiple online platforms accessible today is as easy as a few clicks on your device. Currency outlook should be a factor in all investing decisions.

Mindset and strategies for M-REITs and S-REITs are quite different

See also: The best performance for the Malaysian stock market in a decade. Is it sustainable?

We did a deeper dive into the largest of the S-REITs and M-REITs and highlighted some of their key financials and portfolio compositions (see Table 2).

The SGX-listed REITs are clearly much more expansion-driven, with diversified asset portfolios, both geographically (across Singapore, Australia, Europe, the US, Hong Kong, China, Japan and others) and in terms of the types of real estate acquired (retail, commercial, industrial, logistics and data centres). The values of their investment properties and distribution incomes grew at a much faster clip than their Bursa-listed counterparts between 2014 and 2023. S-REITs are also more active in terms of mergers, opting to grow in size to gain better operational economies of scale, market power and cost of funding. In doing so, they become sufficiently large in market caps and unit base (trading volumes), with more diversified portfolios to attract global investors, including big funds.

In contrast, the assets of M-REITs are predominantly retail-focused (shopping malls) and located in the country. For instance, of the seven largest M-REITs, only YTL Hospitality REIT has assets outside Malaysia. This is because many of the M-REITs are set up as vehicles to monetise development projects undertaken by their promoters (the property developers), with many acting like a backstop for related party developers to sell their properties. Aside from the original promoters, the substantial shareholders are local institutions such as the Employees Provident Fund, Kumpulan Wang Persaraan (Retirement Fund [Inc]) and local unit trust funds.

For more stories about where money flows, click here for Capital Section

Rout in REITs likely to have bottomed

Like most fixed income instruments (such as bonds), many REITs were sold off when the US Federal Reserve started to aggressively raise interest rates since May 2022. S-REITs saw a sharper price drop compared with M-REITs, perhaps owing in part to their more market-driven valuations, with less support from domestic institutions. In fact, total returns for M-REITs have risen in the past two years, even as that for S-REITs fell.

Interest rates sharply higher than in the preceding years have led to higher average borrowing costs, more notably for S-REITs and especially for the smaller ones, as well as increased competition for investor money, including from bank deposits, money market instruments and US Treasuries. That led to material valuation compression and sharply lower prices for S-REITs. For example, the price-to-book (PB) valuation for CapitaLand Ascendas REIT A17U -

fell from 1.34 times in 2021 to 1.17 times currently while that of Mapletree Logistics Trust M44U - dropped from 1.42 times to 0.99 times, and CapitaLand Integrated Commercial Trust C38U - fell from 1.04 times to 0.94 times. The PB valuation for Mapletree Pan Asia Commercial Trust N2IU - fell from 1.22 times to only 0.71 times its book value over the same period — investor sentiment was likely further dampened by its relatively high exposure to the retail-commercial sectors in Hong Kong-China. These are the four largest S-REITs by market cap.

On a positive note, the rout in REITs is probably over, given that interest rates are near or at peak. Expectations for lower interest rates bode well for REITs, as their excess returns over short-term deposits will widen anew. We think S-REITs should outperform M-REITs on the back of lower prevailing valuations and yield differentials (against FDs).

Quality of assets is key

So far, our analysis has shown that S-REITs were, by and large, far outperforming M-REITs in the years prior to the current rate hike cycle, underpinned by their growth-oriented strategies. But even without new acquisitions, good-quality assets can still deliver solid annual returns.

Case in point: The two largest M-REITs — KLCC Property & REITs-Stapled and IGB REIT — have made no significant acquisitions in the past 10 years. Both delivered higher-than-average compounded annual total returns compared with their peers — driven by positive rental reversions and consistently high occupancy rates, as well as positive investment properties revaluations.

By comparison, CapitaLand Malaysia Trust has not performed — despite its pedigree. When it was listed in 2010, CLMT was the largest M-REIT, but the trust has done dismally over the past decade, with compounded annual total returns of -2.9% since 2015. Yes, that is negative compounded annual returns — it means an investor would have lost some 24% of his investment in the REIT by holding and reinvesting all dividends throughout the entire period.

CLMT suffered negative annual rental reversion, on average, for its portfolio of assets. Occupancy rates for Sungei Wang Plaza and The Mines had fallen to between 78% and 79% in 2023, down from 98.8% and 97.5% respectively at its IPO. In 2015, CLMT acquired Tropicana City Mall and Tropicana City Office Tower for RM565 million. The mall, renamed 3 Damansara, has an occupancy rate of only 68% currently. Clearly, the quality of assets is critical to how an individual REIT will perform. The truth is that most observers were shocked by these investment decisions. Unfortunately, we do not foresee a significant recovery for CLMT in the foreseeable future. The logical answer is to sell it and switch to other REITs.

The outlook for the Malaysian retail and office rental market remains challenging, given the pipeline of new spaces coming into the market amid weakening tenancy demand. Only the very prime retail malls and Grade-A office buildings are expected to do well. Older and lower-grade buildings and less popular retail malls are likely to suffer high vacancy rates and, quite possibly, falling rentals over the coming years.


In conclusion, REITs are expected to regain their appeal to yield seekers when global interest rates start to decline. Contrary to expectations, however, they are not as defensive as many might expect. Not all REITS perform equally well over time, obviously, and careful selection is key. Based on historical evidence, the largest REITs have generally outperformed smaller ones, and the quality of asset portfolios is critical. S-REITs are more growth-oriented and have more diversified portfolios in terms of geography and types of real estate. And, in the past decade, they have delivered higher total returns in US dollar terms compared to M-REITs.

The Malaysian Portfolio fell in the week ended May 29, down 1.5% on the back of broader market losses. Only CCK Consolidated Holdings (+6.0%) closed higher for the week. The top losers were Insas Bhd - Warrants C (-8.8%), KSL Holdings (-7.7%) and Insas (-2.8%). Total portfolio returns now stand at 208.7% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 12.3% over the same period.

The Absolute Returns Portfolio also ended lower last week, down 1.9% with all stocks closing in the red. The biggest losers were Swire Properties (-6.5%), SHK Properties (-5.3%), and Tencent (-3.6%). Last week’s losses pared total returns since inception to 3.1%.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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