Even if you’ve just started investing, you’ve probably heard of the term ‘REITs’ or ‘real estate investment trusts’, and for good reason. REITs are often touted as the holy grail of investments, seen by many as high yield investments that provide remarkable returns. No doubt, investing in Singapore REITs (or S-REITs for short) can be highly profitable.
If you had bought a basket of all the REITs in Singapore in 2013, you would have received an annualised total return of 8.4% in a mere five years. In contrast, you would only have obtained a 4.4% return if you had invested in the benchmark Straits Times Index during the same period.
Against this backdrop, Singapore REIT investments present an extraordinary opportunity.
Hence, we have created the following guide to help you understand the basics of REITs and the key considerations for investing in Singapore REITs. At the end of this article, you will not only become more knowledgeable about how REITs work, but you will also learn the skills for investing in a REIT.
What is a REIT?
Put simply, REITs are investment trusts that allow investors to pool their monies together to invest in a portfolio of real estate. In return for their capital, investors will own units in the REIT. These units trade on the Singapore Exchange, just like other listed securities. In this regard, an S-REIT is a Singapore real estate investment trust listed on the Singapore stock exchange.
Key Characteristics of REITs
Typical REIT structure
To learn how to invest in a Singapore REIT, you have to first understand this investment vehicle’s key characteristics.
Usually, REITs use the money they have raised from investors to buy several properties. REITs then lease out these properties to tenants to generate rental income that is then redistributed back to investors in the form of dividends. The REIT also derives income from the sale of properties for profit.
The REIT would typically be subject to some fees and costs. They have to pay fees to the REIT Manager, the Property Manager and the Trustee for their ongoing services. The amount of such fees are typically stated in the trust deed of the REIT and disclosed in the prospectus.
The following diagram shows a typical structure of a REIT and the responsibilities of the various service providers:
Types of REITs
There are a total of seven types of REITs in Singapore, each with its own unique characteristics.
Retail REITs are REITs that invest primarily in properties used for retail activities, such as shopping malls.
To determine the performance of retail REITs, investors can observe the level of foot traffic in the REIT’s properties. This is affected by factors such as tourism, state of the economy and consumer confidence.
Retail REITs carry with them their own set of risks. Recently, there has been rising competition from the e-commerce sector with the emergence of online shopping portals. There has also been an increased supply in physical retail space, which may result in lower rents.
Nonetheless, retail REITs can remain relevant by using innovative ways of attracting shoppers to their malls. REITs can achieve this by enhancing the aesthetics of the malls and offering discounts or promotions.
One key retail S-REIT in Singapore is CapitaLand Mall Trust, which owns shopping malls such as Junction 8, Raffles City Singapore and Plaza Singapura. Another example would be SPH REIT, which holds properties such as Paragon and the Clementi Mall.
Office REITs own and manage office properties, which are leased to office tenants.
For office REITs, tenants usually sign leases of longer terms. This is because office tenants (which are typically big corporations) expect to stay at the same premises for a long period of time. As such, there will likely be a stable stream of rental income coming from these tenants.
There are a handful of large office REITs in Singapore. One of the key Singapore REIT investments is Keppel REIT, which owns and manages office buildings including Marina Bay Financial Centre, One Raffles Quay and Ocean Financial Centre. Another is OUE Commercial REIT, whose portfolio features buildings such as OUE Bayfront and One Raffles Place.
Healthcare REITs are trusts that own healthcare assets such as hospitals, nursing homes and eldercare facilities.
Investing in Singapore healthcare REITs is an effective way for ordinary investors to gain access to hospitals and other healthcare properties.
However, investors have to be mindful of some healthcare-specific risks. For instance, there is the potential for technological disruption. With the rapid pace of advances in technology, new medical innovations may render the current surgical and medical products obsolete. This would have negative knock-on effects on the healthcare assets of the REIT.
Additionally, hospitals may be at risk of being sued for medical malpractice or negligence. This may lead to a loss in reputation and high financial liabilities. In such a scenario, the ability of the REIT to make payments to unitholders will be affected.
Looking at the healthcare sector, Parkway Life REIT is currently Asia’s largest listed healthcare REIT. In Singapore alone, it boasts of properties such as Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital.
4. Hospitality / Serviced Apartments
Next, there are also REITs in the hospitality / serviced apartments sector. These REITs hold hospitality-related properties, including hotels and serviced apartments.
Hospitality REITs depend on the number of tourist arrivals to the countries in which the properties are located. As the hospitality industry is largely cyclical in nature, the performance of the hospitality-related properties varies throughout the year. They tend to perform better during holiday seasons while they experience a dip in revenue in quieter times of the year.
There are certain risks of investing in hospitality REITs that is worth mentioning. In this regard, they are more susceptible to changes in economic and political conditions. For example, hospitality REITs may be adversely affected if there is political instability or an outbreak of a disease in one or more countries where its properties are located.
A notable hospitality REIT in Singapore is CDL Hospitality Trusts, which owns hotels such as Grand Copthorne Waterfront Hotel and M Hotel in Singapore. Further, Ascott Residence Trust has in its portfolio serviced residences such as Somerset Liang Court and Ascott Raffles Place.
5. Industrial / Logistics
Industrial REITs own and manage a range of industrial and logistics properties. This may include warehouses, distribution centres and business parks.
In many cases, industrial REITs rely on certain key tenants for a large portion of their income. Therefore, there will be a big financial impact on the REIT if any of these tenants fails to pay rent or renew its lease. This is especially since there are few alternative industrial tenants with the size to lease such large spaces from industrial REITs.
A prominent industrial Singapore REIT is Ascendas REIT. It invests in a wide range of industrial properties, including Changi Business Park, warehouses located in Tuas and Changi as well as various other industrial buildings.
6. Data Centre
A data centre REIT is one that invests in properties primarily used for data centre purposes. Keppel DC REIT is currently the only data centre S-REIT in Singapore.
Data Centres are very much dependent on the technological sector. Therefore, if there is a rise in the number of internet-related business failures, the data centre industry will experience a sharp drop in demand. This would, in turn, drag down the rental income earned by the data centre REIT.
This was exactly what happened to the data centre industry in the early 2000s. When the dot com bubble burst, data centre usage plunged as technology companies could no longer survive and pay their rent. If a similar scenario played out these days, the data centre REIT would also face similar challenges. Therefore, investors should always evaluate the conditions of the technology market before investing in a data centre REIT.
Diversified REITs are REITs that own and manage properties that span across multiple sectors.
One such example is Mapletree North Asia Commercial Trust (formerly known as Mapletree Greater China Commercial Trust) (MNACT), which has properties in both the retail and office spaces. While MNACT does not own any Singapore properties at the moment, they invest in properties located in Japan, China and Hong Kong SAR.
Having a more diversified portfolio can be beneficial to the REIT. This allows the REIT to be cushioned by a downturn in any one particular industry. Therefore, it does not face the risks arising from a concentration of investments in a single market.
Why Invest in Singapore REITs?
Investing in Singapore REITs gives individual investors like you and me an opportunity to purchase an interest in large and expensive properties in Singapore. In most cases, we would not have been able to own a stake in these properties due to its high cost.
Moreover, S-REITs distribute a minimum of 90% of their taxable income each year to enjoy favourable tax treatment by IRAS. This would translate to higher distributions to unitholders when compared to that of shares in other companies.
Factors to consider when investing in Singapore REITs
How does one go about investing in Singapore REITs?
While there is no magic formula for determining when to invest in a S-REIT, here are some useful factors to consider.
In general, the dividend yields of REITs are relatively high. In fact, it is not uncommon for REITs to have dividend yields of 7% or more.
You may be thinking, the higher the dividend yield the better, right?
Well, not exactly.
There is the possibility of share price depreciation. While the dividend yield of a REIT may appear high, the value of its units may drop drastically. Thus, the gains you obtained in the form of dividends may possibly be completely wiped out by the sharp fall in the value of your units.
A case in point would be Sabana Shari’ah Compliant REIT. At its peak in 2013, its share price was $1.21. However, this dropped to an all-time low of $0.34 in the early part of 2017. During this period, however, the S-REIT still provided high dividend yields of over 7% per annum. Investors who were investing based on the dividend yield of the REIT would have been misled and lost a lot of money.
Another important factor is the occupancy rate of the REIT’s properties. An S-REIT with a high occupancy rate is able to lease out a large majority of its leasable area to tenants. This ensures that they maximise the amount of rental income they can receive.
Having a stable occupancy rate also points to the strength of management. This is because it shows that the management has been able to consistently maintain relationships with existing tenants and procure new tenants.
Weighted Average Lease Expiry (WALE)
WALE refers to the average term of lease expiry, weighted by rental income or leaseable area of the REIT’s properties.
The WALE can be used as a gauge of future occupancy rates.
A lower WALE of below five years suggests that there could be a lack of tenants to occupy the properties in the future. Unless the REIT successfully seeks out new tenants, there is the risk of multiple vacancies and a lower rental income.
Conversely, a higher WALE of above five years provides greater income security due to longer expiry terms.
The gearing ratio reflects the amount of the REIT’s debt to the total value of its properties. Having a high gearing ratio would carry with it certain risks.
One of these risks would be that in the event the REIT becomes insolvent, the debtors would have priority to the assets of the REIT. Unitholders can only claim what’s left.
Additionally, in times of an economic downturn, the REIT with a high gearing ratio would have less of a financial cushion to absorb potential losses.
In any case, the gearing ratio of REITs is legally required to be below 45%. Therefore, investors possess an additional layer of protection when investing in Singapore REITs.
Net Asset Value (NAV)
NAV is another important consideration for Singapore REIT investments. NAV of a REIT refers to the total value of the assets of the REIT minus its liabilities. In the event of the liquidation of the REIT, unitholders should get back assets amounting to the NAV per unit of the REIT.
Units of the REIT trading at a price lower than the NAV per unit can be said to be trading at a discount. When this occurs, investors can consider buying units of the REIT. This is because investors would effectively be buying the underlying assets of the REIT at a lower price than the market rate. The potential for capital appreciation of the assets is also high.
Having made it to the end of this article, you are probably much more aware of what REITs are and how to invest in Singapore REITs. You will also have learnt the various types of REITs that exist in the Singaporean context.
If you’re completely new to investing, here are some investing fundamentals for new investors.