07 Jan 3 Reasons Property Stocks are Perfect for Your Portfolio
The pandemic has demonstrated that property stocks are a resilient asset class that is worthy of your portfolio.
While some sectors have taken it on the chin, the majority of properties have shown the ability to hold its value despite the safe distancing measures put in place.
In fact, there is a class of new economy properties which have risen into prominence since last year.
And that spells opportunity for investors like you and me.
We are blessed in Singapore because we have access to a large variety of real-estate stocks and a favourable dividend policy where we are not taxed for the income we receive.
Property stocks, after all, are prized for their dividends.
The low capital requirement to buy a stock or a real estate investment trust (REIT) firmly puts this class of investment above investing in physical property itself, in our view.
The key is to look for high-quality assets that can hold their own.
The good news is that we now have a clear view of which assets held up during the pandemic.
With that in mind, here are three key categories worth watching.
New economy property stocks growing their rental income
Some sectors such as data centres have continued to grow despite the presence of the pandemic.
Termed “new economy”, these sectors are actually thriving due to consistent demand or the acceleration of existing trends such as digital adoption.
Mapletree Industrial Trust (SGX: ME8U), or MINT, has been aggressively acquiring data centre properties in the US to boost its rental contribution from this up-and-coming asset class.
Data centres now make up close to 53% of its assets under management (AUM) of S$8.5 billion as of 30 September 2021.
Cloud computing, technology, and social media companies continue to drive demand for data centres.
Along with more widespread digital adoption and higher spending on public cloud services, data centres should see consistently high demand into the foreseeable future.
American Tower (NYSE: AMT) is another beneficiary of the explosion in data usage.
An owner of 214,000 communication sites, American Tower can continue to enjoy steady rental income from telecommunication companies that lease its assets.
The introduction of 5G networks should also spur even greater demand for its towers over time.
With in-built rental escalation clauses, the REIT can continue to pay out reliable dividends over the long-term.
Meanwhile, the pandemic has also brought the importance of healthcare to the fore.
Take Parkway Life REIT (SGX: C2PU) for instance.
Its portfolio, comprising three hospitals and 51 nursing homes in Singapore and Japan, respectively, has been almost immune to the effects of the pandemic.
For its fiscal 2021 second quarter (2Q2021), the REIT posted a 4% year on year increase in distribution per unit (DPU).
Impressively, the Parkway Life REIT has reported an uninterrupted increase in DPU since its IPO in 2007, and this trend looks set to continue.
Resilience in retail and commercial buildings
Most real estate agents agree that “location, location, location” is a key attraction in selecting a good property.
Location is indeed an important factor in determining if REITs and property companies can continue to do well.
Take the example of Frasers Centrepoint Trust (SGX: J69U), or FCT.
The REIT well-located portfolio of nine heartland malls provide a variety of essential services to HDB dwellers.
These suburban malls quickly recovered their footfall and tenant sales once Singapore exited its Circuit Breaker measures in June last year.
Although shopper traffic up till July 2021 was just 60% of pre-pandemic levels, tenant sales over the same period have recovered to 91%.
Likewise, over at CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT, its retail portfolio has also done well, chalking up retail occupancy of 96.4% as of 30 September 2021.
Tenant sales have recovered to close to 84% of pre-pandemic levels and are slightly above 2020 levels.
The REIT’s commercial portfolio has held its own as well, with occupancy of 91.7% for its Singapore office assets.
CapitaSpring, the REIT’s newest development in the Central Business District, is slated to open before the end of the year and has a 83.1% committed occupancy rate with another 7.2% under advanced negotiation.
This is evidence that commercial space with a good location is still in demand despite the work from home trend.
Meanwhile, in Hong Kong, Hongkong Land Holdings Limited (SGX: H78), or HKL, has declared an interim dividend of US$0.06, unchanged from pre-COVID levels..
The group’s high-quality commercial portfolio saw vacancies of just 5.5% in Hong Kong and 2.1% for Singapore for the first half of fiscal 2021 (1H2021).
In summary, the operational results from the three REITs above suggest that high-quality assets have held their value amid a pandemic.
The recovery is just beginning
Last but not least, a few REITs have been badly battered by the pandemic.
However, things may be looking up as the economic recovery takes hold.
An example is Manulife US REIT (SGX: BTOU), or MUST, which owns a portfolio of nine Class A office properties in the US.
The current year has been tough with the REIT reporting declining office occupancy, going from 93.4% at the end of 2020 to 91.7% for 1H2021.
Recovery, however, is just around the corner.
The US is experiencing a leasing volume uptrend in the second half of this year that should benefit MUST.
At the same time, rental escalations are also positive at 2.1%.
The strong economic recovery and declining unemployment rate should boost occupancy rates over the medium term.
Get Smart: Choose quality and hold for the long-term
The above examples demonstrate that properties with great locations can continue to hold their own even during times of economic stress.
Investors should, therefore, go for quality property stocks such as REITs and developers with a strong track record.
They have proven to be resilient during this pandemic and can still churn out a dependable dividend
The key is to stick with quality and hold for the long-term to ride through inevitable economic storms that come along from time to time.
What do real estate, Malaysia, Asia’s retail and healthcare have in common? They are a rich source of dividends! And in 2022, these 4 sectors look to be full of companies with healthy cash flows and dividends. If you want to own some of these stocks yourself, then grab a copy of our latest special report. Click here to download it for FREE.
Disclaimer: Royston Yang owns shares in Mapletree Industrial Trust and American Tower.