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Healthcare S-REITs: Defensive Growth Amid Economic Uncertainty in Singapore






Comprehensive Analysis of S-REITs: Insights from OCBC Investment Research


Comprehensive Analysis of S-REITs: Insights from OCBC Investment Research

Date: 17 December 2024 | Broker: OCBC Investment Research

Introduction to Healthcare S-REITs

In a landscape marked by uncertainty, especially with President-elect Donald Trump’s victory, the outlook for Singapore Real Estate Investment Trusts (S-REITs) has been notably clouded. Investors face a cautious environment where limited Federal Reserve rate cuts might pose risks to distributable incomes. Amidst this backdrop, OCBC Investment Research prefers quality names that are backed by strong sponsors, possess healthy financial positions, and have exposure to Singapore assets. The healthcare sub-sector of S-REITs, due to its defensive nature, emerges as a promising area for investors seeking stability and growth.

Parkway Life REIT: A Promising Player in Healthcare S-REITs

Parkway Life REIT (ticker: PREIT SP) emerges as a preferred choice within the healthcare S-REIT space. Known for its robust portfolio, Parkway Life REIT comprises private hospitals such as Gleneagles and Mount Elizabeth in Singapore and Malaysia, along with nursing homes in Japan. Recently, the REIT expanded into Europe by acquiring 11 nursing homes in France, marking its third key market. Despite its geographical diversification, Singapore remains its core focus, anchoring its relatively stable and low-risk profile.

Lease Structures and Financial Performance

Parkway Life REIT benefits from favorable lease structures that ensure a steady stream of rental income, providing downside protection during market downturns. It also offers growth prospects through periodic rental escalations in Singapore and Japan, with potential for upside sharing from 2026. In 2022, the REIT renewed its master leases in Singapore for 20.4 years, committing substantial CAPEX into Mount Elizabeth Hospital. This strategic investment is expected to significantly boost rental income by 24.4% in FY26.

Track Record and Financial Outlook

Parkway Life REIT boasts an uninterrupted track record of distribution per unit (DPU) growth since its listing in 2007. Despite a weak Japanese Yen impacting financial performance in SGD terms, the REIT has effectively hedged its currency exposure till 2029. Management anticipates continued DPU growth, driven by potential performance-based rent from Singapore hospitals and further European acquisitions.

First REIT: Navigating Emerging Markets

First REIT (ticker: FIRT SP) stands as the pioneering Singapore-based healthcare REIT focused on diverse, yield-accretive healthcare-related assets across Asia. Its portfolio includes hospitals in Indonesia and nursing homes in Japan and Singapore. A key highlight for First REIT is its 2.0 Growth Strategy, aimed at de-risking its portfolio by increasing exposure to developed markets to over 50% by FY27.

Portfolio Diversification and Growth Strategy

First REIT’s strategy is underpinned by four pillars, including reducing reliance on any single tenant and targeting developed markets. The acquisition of 14 nursing homes in Japan in FY22 marked a significant step towards this goal, diversifying its lessee base. The REIT is eyeing markets like Australia for further expansion, yet faces challenges due to elevated interest rates and funding constraints.

Financial Performance and Risks

Offering an attractive forward dividend yield of 9.4%, First REIT’s 3Q24 DPU saw a 3.3% decline quarter-on-quarter, primarily due to currency depreciation. Furthermore, potential write-offs of rental outstandings could impact future DPUs. The REIT aims to reduce concentration risks by lowering dependence on key tenants like PT Lippo Karawaci Tbk and Metropolis Propertindo Utama in the long term.

Conclusion: Investment Merits of Healthcare S-REITs

The healthcare sector’s defensive nature, coupled with long-term growth drivers such as aging populations and increased healthcare spending, makes it an attractive proposition for investors. Both Parkway Life REIT and First REIT present unique opportunities and challenges, with Parkway Life REIT offering stable growth and First REIT focusing on diversification and risk mitigation. Investors are advised to consider their risk profiles and adopt a whole-portfolio perspective when assessing these S-REITs.


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