Singapore’s landlords have made the most of the post-pandemic reopening. With no lockdowns or curbs on in-restaurant dining, Paragon REIT, the real estate investment trust that owns shopping centres in the city-state and Australia, has more than doubled its annual dividend from 2020. Overall, the members of the island’s main index of institutional landlords paid out nearly $1 billion more to unit-holders in 2022 than two years earlier.
But now, their cash-generation engines are looking tired. High global interest rates are pushing property owners’ funding costs higher, while an uncertain growth outlook makes tenants wary of expensive leases. Malls and hotels may still benefit from a return of Chinese tourists, but there could be weakness elsewhere. In recent years, a big share of office space in the financial centre has been taken up by global tech giants. They’re now cutting headcount. Singapore REIT prices have corrected sharply.
As a result, the dividend yield on the composite index is now about 3.3 percentage points higher than the yield on the 10-year Singapore government bond. The gap, which represents the additional compensation unit-holders are demanding to hold REITs instead of sovereign debt, has almost tripled since June. Depending on how you look at it, that’s already a gloomy sign — or probably the spread could do with a little more pessimism. The collapse of California’s Silicon Valley Bank and the closure of New York’s Signature Bank might strike just the right note of despair to prompt a more favourable reassessment of Singapore’s property owners.
REITs generate rental incomes and pass them in a tax-efficient manner to investors. The business is highly sensitive to interest rates. A 50-basis-point increase means distribution per unit will be lower, on average, by about 2%, according to Maybank Research Pte. Until now, it looked like 2023 will be a year of higher-for-longer rates, a cheerless backdrop for dividends.
But if banking troubles in the US force the Federal Reserve to abandon or pause its monetary-tightening campaign, then the equation changes dramatically for real estate. Office-space demand can receive a boost if the global rich continue to be drawn to the island-state for managing their wealth. “If the opening of family offices continues, adding net new demand of a million square feet at higher spot rates is not inconceivable,” Maybank analyst Krishna Guha wrote last month.
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Singapore’s economy, highly exposed to global growth and financial conditions, could become more confident about hitting at least the midpoint of its official forecast of 0.5% - 2.5% expansion in output. A revival in the fortunes of the technology industry may see more deals like the one last year when Amazon.com Inc. snapped up 369,000 square feet in IOI Central Boulevard Towers, a new project expected to be ready in 2023.
In the past, whenever investors have demanded a premium of one standard deviation over the long-term average of the local government bond yields, the subsequent demand for Singapore’s REIT assets has usually seen a smart recovery.
The spread hasn’t quite widened that much yet, and it’s impossible to say if the pattern will repeat. What’s clearer, though, is that the locus of the reopening narrative has now shifted to China — and Singapore’s arch-rival, Hong Kong. While continuing to cater to the tech industry, the city-state’s office market has to find a new leg of expansion.
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That could well be looking after money. Singapore has attracted about 700 global offices, a sevenfold increase since 2017. From Google co-founder Sergey Brin and Ray Dalio, the billionaire founder of the world’s largest hedge fund, to James Dyson, chairman of the vacuum cleaning giant Dyson Ltd., and Mukesh Ambani, the richest Indian tycoon, the global wealthy keep coming to the city even after it tightened the requirements for them to enjoy tax-exempt incomes. Their investment staff will need space.
The problem is that the employees’ families will also need places to live — and school spots. Both have been in short supply. Singapore’s housing market went crazy last year, with a 30% jump in rents, the most since 2007. Analysts at Bloomberg Intelligence forecast them to rise by another 10% - 15% this year. Higher accommodation costs feeding into wage expectations could end up being a drag on commercial property if more multinational companies decide to bulk up in Hong Kong, reversing a hollowing-out of the Chinese territory’s talent pool.
In general, Singapore’s landlords have sensible leverage, but a 6% or higher rate on the federal funds rate — a possibility that was being discussed very recently by analysts including former US Treasury Secretary Larry Summers — wasn’t exactly baked into their cost-of-money calculations. Suddenly, the market has pared expectations of the terminal rate to about 5%. Lower funding costs mean more of the rental income can go to REIT shareholders, making the securities more attractive. Provided the SVB mess doesn’t become a harbinger of another 2008-type financial crisis, it might just be the lucky break the city’s real-estate industry has been waiting for.