3 ways Singapore REITs use to grow their DPU despite inflation and high interest rates

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The REIT sector has been in turmoil lately.

High interest rates and skyrocketing inflation have dampened demand for this asset class.

These headwinds could drive up operating and finance costs, lowering REIT distributions per unit (DPU).

Despite these headwinds, REITs continue to be an option for income-seeking investors as they offer reliable distributions.

REIT managers can also employ various methods to mitigate the effects of high inflation and interest rates.

We will highlight three of these techniques and provide some examples of REITs that have adopted them.

Acquisition

Acquisitions are the primary way REITs build and grow their portfolios to pay higher DPUs.

A REIT manager will finance an appropriate acquisition if the net property income (NPI) yield of the asset exceeds the REIT’s borrowing costs.

At the same time, REITs must also consider their capital structure to ensure that their total leverage levels are not too high, capped at the 50% cap mandated by the Central Bank of Singapore.

Therefore, REITs that are reasonably calibrated and have low borrowing costs can identify yield-enhancing properties to acquire.

A recent example is Mapletree Industrial Trust (SGX: ME8U), or MIT, has acquired a 98.47% stake in a data center in Osaka, Japan for S$500 million.

The acquisition is expected to boost DPU by 2.1% to S$0.1385 in 2023.

Another REIT under Mapletree, Mapletree Logistics Trust (SGX: M44U), or MLT, has announced a series of acquisitions totaling S$946.8 million for a total of eight properties in Japan, Australia and South Korea.

The logistics REIT is also in talks to acquire two more properties in China for nearly S$210 million.

in early June, iREIT Global (SGX: UD1U) announced the acquisition of 17 commercial properties for approximately €76.8 million.

DPU is expected to rise by 2% from €0.023 to €0.0235.

Done right, acquisitions can be an effective way to steadily grow a REIT’s asset base and DPU.

Initiatives to Strengthen Assets

The Asset Enhancement Initiative (AEI for short) helps REITs improve the quality and gross floor area (GFA) of their existing properties through upgrades, renovations and/or renovations.

These AEIs comprise a wide range of options, including adding new wings to office buildings, reconfiguring spaces within shopping malls, and trimming and enhancing the façades of hotels and serviced residences.

Such AEIs help to refresh properties and make them more rentable for tenants. REITs will also charge higher rents with these upgrades.

AEI also includes redevelopment projects that make major renovations to a property or set of properties in order to increase the GFA in parallel with an increase in site coverage.

MIT just redeveloped the Column Ayer cluster of three properties into the new Mapletree Tech Park @ Callan Way, increasing the GFA of these properties from 506,720 sq ft to 865,600 sq ft.

for AIMS APAC REIT (SGX: O5RU), the industrial REIT just completed a S$1.6 million AEI on its 23 Tai Seng Rive property, leading to a valuation boost and a 32% increase in net lettable area.

Singapore’s oldest industrial REIT, Capital Land Ascend REIT (SGX: A17U), or CLAR, has a number of ongoing AEI projects with a total estimated cost of S$617.4 million.

These include the redevelopment of two properties in Singapore and AEI of Property Alpha in Singapore, and a conversion project to suit in the United States.

Aggressive rental return and rental escalation

The third method is REIT organic growth through aggressive rental return and rental escalation clauses.

Positive rental reversion refers to REITs charging tenants higher rental rates.

In the case of rent escalation, these clauses are built into the tenancy agreement and are typically benchmarked to the consumer price index.

CLAR’s portfolio delivered a positive rental return of 8% in 2022 after growing 4.5% in 2021.

MLT had a positive average rental return rate of 3.1% in the latest quarter.

for Keppel DC REIT Over half of (SGX: AJBU)’s data center portfolio incorporates inflation-based revenue and rent increases.

These clauses help the REIT’s rental income keep pace with inflation, thus contributing to increased organic income.

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Disclosure: Royston Yang owns shares in Mapletree Industrial Trust and Keppel DC REIT.


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