Asia Tea Time - Cup 32 ☕

October 28, 2023 • Estimated Reading Time: 5 minutes

This week, I cover Singapore REITS, Singapore tax allowances, and Japan's stock market.

Macro in Asia

Singapore REITs start to report earnings amid high interest rates

Many of Singapore’s biggest REITs, including Mapletree Logistics Trust and CapitaLand Ascendas REIT, reported their quarterly earnings or business updates.

While some REITs are managing to boost their distribution per unit (DPU) slightly, many are seeing a stagnant or even falling DPU.

Why it’s happening

  • Unless you’ve been living under a rock the past 18 months, investors would have noticed that interest rates are increasing. That’s bad news for REITs.

  • That’s because Singapore’s REITs, like REITs anywhere, rely on the big D (Debt) to grow and – unfortunately for them – debt is expensive right now.

  • Even the bigger Singapore REITs are struggling – for example, Mapletree Industrial Trust saw its DPU (or dividend) fall 1.2% year-on-year in its latest quarter.

Why it matters

  • How long will interest rates stay this high? That’s what most investors are asking, and particularly REIT investors.

  • If you’re a REIT and rely on debt to grow your business but that debt is now more expensive, your growth is going to slow. In turn, that’s going to put a dent in your ability to pay out higher and higher dividends.

  • As a result, investors also don’t want to put money into REITs. If you can get a 5% yield sitting in cash or buying a 10-year US Treasury bond, why bother taking any risk?

What’s next?

  • For Singapore’s REITs, the interest rate picture in the US is key to the outlook for the sector in the next 12 months.

Tim’s Take 

  • Investors in Singapore have basically had over a decade of what’s considered the ideal environment for REITs – close to zero level interest rates.

  • With debt so cheap to grow portfolios, and investors desperate for yield, REIT investors have enjoyed great returns (on the whole).

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But that environment has shifted dramatically since the beginning of 2022, as interest rates in the US have risen at their fastest pace in over three decades.

The problem with REITs now is that the funding cost of developing a project has risen at a fast and furious pace. 

But rental rates, which should rise in line or above inflation, have failed to catch up and so Singapore REITs have been caught in a bind – higher debt costs with little traction on rental rates.

Remember that REITs are required by law to pay out 90% of their profits as dividends – meaning they effectively have a 90% dividend payout ratio. 

In any traditional dividend investing sense, that’s a high payout ratio and so you can’t expect fast-growing dividends from them in this environment. 

  • At the end of the day, investors in Singapore’s REITs should stick to the “tried and tested” – aka the big REITs which have favourable lending terms, strong sponsors, ability to strike good deals and potential to protect their distributions from being cut too much. 

Tim’s money tip of the week

It’s never a bad time to think about saving money on your taxes. With the tax year coming to an end at the end of 2023 in Singapore (although it will differ from country to country), it’s time to think about where we can save as no one likes giving more to the tax authorities than we need to.

Thankfully, Singapore has many tax allowances and reliefs on offer. Just by going to the page on “reliefs, rebates, and deductions” of the Inland Revenue Authority of Singapore (IRAS), people can find out exactly what tax reliefs they’re eligible for.

For example, individuals in Singapore can get tax relief on things such as life insurance premiums, Supplementary Retirement Scheme (SRS) contributions, and professional course fees, among others.

Similarly, in other countries, it doesn’t take much effort to find out what reliefs you’re eligible for. In this environment of uncertainty for the global economy, every dollar saved counts! 

Story of the week

Japan is on a high right now. Its stock market is hitting new highs in 2023 and just this past week news came out that investment banks are now earning more fees from Japan than China – the first time that’s happened in nearly 25 years.

According to Dealogic, investment bank revenues from stock market activity in Japan have totalled US$440 million in 2023, making up 30% of the Asia-Pacific total.

Meanwhile, China accounted for US$367 million in fees. Hong Kong’s IPO market has been hit hard in 2023 while Tokyo’s stock market’s continued rally attracts new listings.

For now, it looks like Japan’s stock exchange has the upper hand.