Blog #21 The Performance of S-REITS

REITs offer a liquid alternative to physical property, both in terms of income and ease of transactions (buying and selling). After all, REITs already own a clutch of income-producing properties, the bulk of which are distributed to shareholders. And unlike physical properties, you can easily buy or sell shares of REITs on the stock exchange on any business day.

In this blog, I intend to give you a historical perspective of the performance of Singapore REITs (S-REITs). While past returns do not guarantee similar returns in the future, we can’t ignore history either.

My period of analysis is from August 2002 when the first S-REIT was listed on SGX through June 2017. a period of about 15 years. My data consists of monthly returns, inclusive of dividends reinvested.

Here’s what I will present. First, I will show the performance of S-REITs versus that of property stocks and the overall stock market over the whole sample period. Choosing a long sample period is important because if we cherry pick the best period for S-REIts, we are deliberately inflating performance and kid ourselves. A long sample period on the other hand will feature both good times and bad times, though not in equal measure.

Second, I want to be “kiasu” and zero in on periods which may be particularly stressful for REITs. These would be periods when interest rates are high and periods rocked by a major financial crisis. Fortunately, my sample period contains both. 😦

Let me first show you how $100 invested in each of the following indices in August 2002 ended up 15 years later:

  • FTSE ST Real Estate Investment Trusts index
  • FTSE ST Real Estate index
  • FTSE ST All-Share index

FTSE refers to Financial Times Stock Exchange and “ST” refers to the Straits Times. The above stock market indices track the returns of S-REITs, property developers and all shares traded on SGX. The indices are so-named because they are the result of a partnership between FTSE in the UK, and SPH and SGX in Singapore. Note that all three indices are market-capitalization weighted. That means bigger companies receive larger weights (i.e., have more influence) in the each’s index movements.

Without much ado…, here is the total returns chart showing how $100 invested in each of the above index ended up 15 years later.


The picture says it all. If you invested $100 in REITs 2002 and stayed invested throughout, by June 2017, your $100 would have grown to $620.  Property stocks came in second, with an ending value of $543, and the overall stock market third, with an ending value of $335.  So, REITs outperformed property stocks by a factor of 1.14 and outdistanced stocks by factor of 1.85!.

Those of you who like to assess investments using “average return” can easily see that the geometric mean return (per year) are:

  • 13% for REITs (divide 620 by 100 and take this to the power of 1/15, then subtract one)
  • 12% for property stocks
  • 8.44% for stocks in general

To put things in perspective, the stock market’s 8.44% is in fact a great average return, no question about that. But it the mind-blowing performance of REITs and property that put the stock market in the shades.

I promised earlier on that I will “stress test” REITs by looking at how they fared during stressful periods. Well, one stress period was between Jan 2004 and July 2007 when interest rates were high compared to the average interest rate before or after that. You can see this clearly from the following chart showing the 1-month Singapore Interbank Rate (SIBOR) over the full sample period.


On average, between January 2004 and July 2007, REITs returned 2.25% a month, slightly lower than property stocks (2.85%) but way above the 1.95% average return of the stock market. This period is interesting counter-example to the conventional wisdom that high interest rates are always bad for high leveraged stocks like REITs and the stocks of real estate developers.

A year later came the Global Financial Crisis of 2008-2009. The eye of the storm was from August 2008 to March 2009 during which all three indices were badly hammered.As investors lost confidence in the ability of banks everywhere to extend credit, companies which depend heavily on borrowings like REITs and property stocks suffered the brunt of the banking crisis. REITs and property stocks lost 55% and 53% of their values respectively in a space of 8 months, while the overall stock market lost 46%.

The only consolation for REITs was that the financial storm soon blew over, and stock prices rebounded smartly and continued their upward march. From April 2009 to June 2017, REITs returned an average of 1.54% per month or 18.48% annualized.  REITs again were the clear winner over this period, outperforming property stocks by 0.9% a year and the stock market by an impressive 4.8% a year.

In short, the data shows that REITs and property stocks have been extremely rewarding and resilient investments.

But wait a minute!

What about risk? Maybe we should expect REITs to have higher average returns because they are riskier.  One simple way to account for risk is to compute the Sharpe ratio of each index. The Sharpe ratio is the average return (in excess of a risk-free interest rate) over volatility, where volatility is measured by the standard deviation of excess returns. The higher the Sharpe ratio, the better is the risk-adjusted performance of the asset.

The following chart shows that REITs are still the winner in terms of the Sharpe ratio.



Whether REITs will continue to shine going forward as they have done in the past is anyone’s guess but history is on its side. Moreover, the continued popularity of REITs seems assured for two reasons. One, many folks want property exposure but simply can’t fork out the millions to invest in physical property. And two, the steady dividends that REITs provide makes them a compelling asset class for income-loving investors. Indeed, the data shows that it is total returns, and not price returns that explain why REITs stand tall in performance relative to property stocks and stocks in general.  But I think you have enough of data for today :/






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