Despite a volatile and unpredictable 2020, it’s always important to remember why investors choose to invest in REITs. While the asset class can certainly offer the possibility of price appreciation (or depreciation), a stable and predictable income payout through dividends has been its main historical source of return.
Indeed, over the past 10 years, AP REITs have provided, on average, annualized returns of 6.8% of which roughly 5.0% of the total return were from dividend payouts.² To put this dividend yield into perspective, Asia ex-Japan equity markets offered, on average, a 5.4% total return, with only 2.4% coming from dividends over the same time period.³
Despite the notable challenges of the past year, from another perspective, historically, the yields AP REITs can produce are also attractive to investors in the current lower-for-longer interest-rate environment since yields for developed-market sovereign bonds have steadily declined since December 2015. In some developed markets, bond yields have even turned negative, with the current level of negative-yielding debt instruments valued at nearly US$18 trillion and expected to climb even higher in the near term.
While the lower-for-longer interest-rate environment represents a headwind for many fixed-income segments, it’s supportive for REITs due to lower borrowing costs.
Despite these traditional strengths, 2020 was indeed a challenging year for REITs globally as well as in Asia, as the economic impact of the COVID-19 pandemic called into question the asset class’s predictable history of dividend payout.
The past: early 2020
The global outbreak of COVID-19 had a varying impact across the subsectors of real estate, although it had initially led many to question the viability of dividend payouts in a worsening environment. The worst-hit sector globally was retail as a result of national lockdowns and social distancing requirements.
In contrast, industrial/specialized real estate assets continued to generate stable cash flows and high-income visibility, as the acceleration in e-commerce trends led to stronger demand for warehousing and logistics facilities.
Many segments of AP REITs have gradually recovered from the economic shock due to unprecedented monetary and fiscal policy measures. Policy responses from governments such as Singapore and Australia have helped to save jobs and keep companies afloat, with some packages totaling up to 20% of GDP. At the same time, central banks across the region have slashed rates, with the Reserve Bank of Australia implementing quantitative easing for the first time in 2020.
The present: end of 2020¹
The top priority across all landlords and REIT managers has been to ensure high cleaning/maintenance standards, introduce temperature checks to protect all their tenants, and instill confidence for people to visit their facilities. The pandemic has brought about unprecedented economic impact and all stakeholders will be affected in one form or another.
Landlords for commercial assets in Singapore and Australia are mandated to provide rental holidays for tenants who were badly affected by the loss of sales/income. They’ve also offered to help in terms of rental commissions, waive management fees, and lease restructuring to tide over tenants through the difficult period.
Some suburban retail landlords have also accelerated their digital marketing plans to help their tenants sell their products online or provide food delivery services for their food and beverage tenants. With more people working from home, these suburban malls have ramped up their digital offerings to capture sales in their neighborhood.
The future: 2021
Moving into 2021, we think the macroeconomic backdrop should gradually improve, with significant dispersion in economic growth across the region.⁴ Despite the economic rebound, we expect the low interest-rate environment to continue to act as a strong tailwind for the asset class. The low cost of borrowing continues to underpin healthy demand in trophy assets across Asia.
Our base case scenario is that key markets such as Singapore, Hong Kong, and Australia wouldn’t enter into national lockdowns in light of the policies that have been implemented and experiences from the past months. The positive news flow about vaccine successes could restore confidence in consumer and corporate spending in 2021.
Retail landlords should enjoy a recovery in cash flows given the low base in 2020 (high rental reliefs), and industrial REITs will likely remain stable with growth boosted from accretive acquisitions.
In light of our base case scenario and favorable macro backdrop, the outlook for yields of AP REITs should remain attractive next year, during which the forecast yield for AP REITs is approximately 5.1% compared with 2.1% for Asian equities.⁵ In our view, this payout is expected to remain stable over the long term largely due to the strength of the asset class and improved economic conditions.
In our view, the main attraction of AP REITs as an asset class is its ability to provide a stable, sustainable payout of dividends to investors. While this assumption was challenged in early 2020, the response by governments and central banks has helped to stabilize the real estate sector. Moving into 2021, we believe an improving economic outlook and continued low interest rates should be beneficial for the asset class.
1 As of this writing, December 2020. 2 Bloomberg, as of November 30, 2020. 3 Bloomberg, as of November 30, 2020. Asia ex-Japan REITs are represented by FTSE EPRA Nareit Asia ex Japan REITs Index. Performance is in U.S. dollars. YTD refers to year to date. 4 Bloomberg, as of December 15, 2020. The consensus growth estimate for Asia-Pacific in 2021 is 5.5%. India and China are expected to lead the region’s growth at 8.0%, with Southeast Asian economies experiencing a slower rebound. 5 Bloomberg, as of January 4, 2021. 6 Bloomberg, as of November 30, 2020. REIT yield and equity dividend yield are the projected 12-month yield from Bloomberg consensus. The Australia yield is represented by the S&P/ASX 200 A-REIT Index, the Hong Kong yield is represented by the Hang Seng REIT Index, and the Singapore yield is represented by the FTSE ST Real Estate Investment Trusts Index. Equity dividend yield is represented by the following indexes, respectively: The Straits Times Total Return Index, the Hang Seng Index, and the S&P/ASX 200 Index. 10-year government bond yield is represented by local generic 10-year government bond yield. Projections or other forward-looking statements regarding future events, targets, management discipline, or other explanations are only current as of the data indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different than that shown here.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
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