REITs for Beginners in Singapore: The Ultimate Guide
A REIT is an investment vehicle that provides an easy way of gaining exposure to real estate properties. REITs have become extremely popular in Singapore for the fact that they return at least 90% of their disposable income to shareholders. Their dividend yields are usually higher than what most investments can offer.
Perhaps the most important reason why REITs are becoming extremely popular is the fact that they provide a way of owning a property indirectly without having actually bought it.
Singapore REITs should be a consideration for anyone planning to build a fixed or equity income portfolio. The total annualized return for S-REITs (Singapore REITs) over the past four years has averaged 8.4% compared to 4.4% for the benchmark Straits Times Index.
Their ability to generate dividend income along with capital appreciation makes them an excellent alternative to stocks, bonds, and commodities investment.
What is a REIT?
Real Estate Investment Trusts (REITs) are companies that own and (sometimes) operate a portfolio of real estate properties such as apartments, warehouses, malls or hotels. Their business model comes with important tax advantages that optimize returns.
Through the purchase of individual company stock of a REIT, investors stand a chance of earning a share of the income produced through real estate investment. Singapore REITs operate by leasing space and collecting rent on the real estate property. The generated income is normally distributed to shareholders in the form of dividends.
REITs allow individuals to own or finance properties the same way they invest in other industries or stocks of companies. In addition, they provide an opportunity to benefit from investing in income-producing real estate.
Singapore REITs are required by law to distribute at least 90% of their taxable income to shareholders. Some pay out 100%. Aside from earning dividends, REITs investors also stand to benefit from capital gains that come into being as the value of property owned increases.
Investments in REITs are mostly done through individual companies, exchange-traded funds, or mutual funds.
Types of REITs
These types of REITs own property in a wide range of sectors. For instance, they could own property for office spaces, shopping centers, hotels and even apartments. Equity REITs derive their revenue from rent paid by tenants in the properties they own.
These types of REITs specialize in financing residential and commercial properties. Unlike Equity REITs, they derive most of their income from interest earned on investments they make on mortgages as well as mortgage-backed securities.
This type of REIT invests in shopping malls and freestanding retail. Most shopping centers are owned by REITs which generate money from the monthly rent. CapitaLand Mall Trust is one of the biggest REITs in the sector with holdings in JCube and Raffles City.
These REITs own apartment buildings as well as manufactured housing. The best in this class are the ones that own property where homes are affordable, thus enjoy the benefits of high occupancy rates. Saizen is the main player in the space with holdings in Japanese residential properties.
Commercial REITs invest in office buildings and receive money from tenants who have signed long-term leases. CapitaCommercial Trust is one of the biggest REITs with stakes in the sector as it owns Capital Tower and HSBC building, among many more.
Healthcare REITs invest in properties associated with healthcare facilities, such as hospitals, nursing homes, and assisted living properties. Parkway Life REIT is one of the biggest in these sectors in Singapore.
They own properties used for industrial purposes such as warehouses and manufacturing centers. Ascendas REIT is the largest in the sector with a portfolio of business and science park properties.
Non-traded REITs vs. publicly traded REITs
Non-traded REITs are real estate investment trusts that are not publicly traded. Carrying out research on these real estate investments can be difficult, given that getting information about their financial or property holdings can be a challenge.
This, in turn, makes it impossible to determine their actual value for investment purposes. While some of them reveal their assets holdings and value after 18 months, they may not be ideal for short-term investors.
Another major drawback with non-traded REITs is the fact that they are illiquid. The ability to buy and sell them is significantly affected. Some of them only allow investors to withdraw their money after seven years. By locking in investors’ money, such securities are usually able to buy and manage properties.
The risk with pooled money is that investors could be fooled by payouts that are not generated from property holdings, a practice that is unsustainable for the long haul. Limits on cash flow most of the time goes a long way in diminishing share price value.
Publicly Traded REITs, on the other hand, are real estate investment trusts that are publicly traded and are regulated by authorities. Such securities are obliged to choose the right management teams and the quality of their properties is usually based upon to date trends.
How to buy REITs in Singapore
REITs can be bought like other public stocks in exchanges. They can also be bought as shares in mutual funds and exchange-traded funds. One can also invest in REITs through retirement savings and other financial funds.
To Invest in REITs in Singapore you must first open two accounts.
SGX CDP account
To be able to buy and own shares of any company you must first open a CDP account. Simply put, a CDP account is like a personal safe where shares bought through the open market are deposited. The account can be opened by going to the Singapore Stock Exchange website and opening one.
In addition to opening a CDP account, a brokerage account is needed. A brokerage account is also known as a trading account. Brokers act as middlemen as they facilitate the buying and selling of shares through their platform.
Some of the popular brokerage firms in Singapore include CIMB Securities, Maybank Kim ENG, and OCBC Securities.
Investing in REITs
Once the two accounts are set up, investors can decide to buy individual REITs or invest in a basket of ETFs or mutual funds. ETFs are passive funds that try to replicate all the aspects of an underlying index, such as the Singapore REITs Index, right from holdings to returns.
SGX REIT Index tracks the performance of various real estate investment trusts in Singapore. Investors use the index to determine the overall sentiment in the market, for making real estate investment decisions.
Nikko AM-Straits Trading Asia ex-Japan REIT ETF is one of the most popular REIT ETF in Singapore that tracks the performance of the SGX REIT index. Its portfolio is made up of more than half of SGX REIT holdings with the remaining diversified across Asia.
How to choose a REIT
Just like other investments, REITs are judged by their yields and net asset value (NAV). Yields refer to the distributions per unit that a REIT has paid out to investors over the year. NAV, on the other hand, refers to a recent valuation of REITs’ assets minus liabilities.
Before investing in a REIT it is important to carry out due diligence, as high yield does not necessarily mean a REIT is an attractive buy.
Valuation is important
- Real estate investment trusts rely on underlying real estate properties to generate income. Valuation is thus important which means an investor should not overpay just to get a piece of a REIT holdings.
- A REIT worth investing in should possess the growth element. In this case, it should be in a position to guarantee consistent growth in rental income which leads to higher dividend yields. Growth can either be organic or inorganic.
- Inorganic growth is whereby a REIT is able to expand its portfolio through new property purchases that have the potential to generate more rental income. Organic growth, on the other hand, may come through positive rental reversion and increased occupancy.
Good cap rate
- REITs grow their holdings by buying and leasing property. That said, a good REIT should have a good capitalization rate which means better returns on any investment made over time. A higher capitalization rate underscores the management ability to generate higher rental income on the property.
Benefits of REITs investment
Secure and stable
- S-REITs are some of the most secure and stable investment tools for income-focused investors. Given that the country is slowly emerging as a financial and technological hub, property prices are expected to continue rising.
- The result should be an increase in rental income that REITs generated from a property portfolio. Given that REITs in the country are required to disburse 90% of their income, investors are assured of solid returns no matter what.
- The fact that Singapore has limited land to expand on means that in the near future, demand could supersede supply. The aftermath would be an increase in property prices which could see REITs generate even more in rental income. Investors would thus be able to earn more in terms of distributions per unit as well as dividends.
- Monetary Authority of Singapore, which is the country’s de-facto central bank regulates REITs in Singapore. The regulator ensures that REITs borrowings in the country don’t exceed 35% of their total assets and can only borrow up to 60% with a credit rating from one of the three rating agencies.
- REITs in the country are also prohibited from spending 10% of their total asset value on new development. All these regulations are designed to protect investor’s interest while ensuring they are able to generate maximum returns from investments.
- However, it is important to be cautious as there are REIT managers that can mismanage a REIT in total disregard of the regulations.
- Unlike in other parts of the world, real estate investment trusts in Singapore are exempted from the normal 17% corporate tax. It is for this reason that they are able to offer high yields on the distribution of 90% of their distributable income as dividends
- REITs dividends are also secured by stable rental income, from long-term leases that managers sign. Managers are also known to employ conservative leverage on balance sheets, significantly reducing risk exposure.
- The main attraction to REITs compared to other investments is their high dividend yields. As mentioned previously, REITs distribute at least 90% of their profits to investors on a regular basis, be it quarterly or semiannually. The amount is usually not subject to taxation. Average REIT returns trend in the 7%-8% range.
- REITs provide exposure to a wide portfolio of real estate compared to owning a single property. REITs own property in a wide array of industries, be it in the retail sector, healthcare, or industrial. When occupancy in one sector is low, it is often offset by outperformance in another sector. Adding a REIT in an investment portfolio provides much-needed diversification.
Reliable stream of income
- REITs sign long-term leases with tenants for the physical properties they own, which accords them a reliable stream of monthly income in the form of rent.
- REITs are traded on stock exchanges, thus making the process of buying and selling them easy.
REITs investment risks and drawbacks
While REITs are a sure way of generating consistent income and for diversifying an investment portfolio, they also come with a fair share of risks just like other investments.
- The fact that REITs are required to distribute 90% of their profits to investors means they are only left with 10% for reinvesting. That said, some REITs grow at a slower pace given that they are usually left with a small amount of money to pursue growth opportunities.
- Cash flows for REITs are most of the time affected by the amount of property taxes paid. Taxes are considered part of the expenditure and have to be deducted before any payout is made to shareholders. In worst case scenarios, property taxes can account for as much as 25% of the total operating expenses, significantly affecting the amount of money left to investors.
- That said, an increase in property taxes can significantly affect the amount of returns REITs generate on a fixed rental income. State and municipal authorities can increase property taxes at any given time to meet their budget pitfalls, significantly affecting shareholders’ cash flow.
- In addition to the high yield that REITs come with, the amount of taxes due on dividends is at times much higher compared to other investments. This is because a good chunk of REITs’ dividends are considered ordinary income and subject to a higher tax rate.
- Real estate properties are usually the hardest hit in case of economic recession. During the recessionary period, demand for commercial real estate will often take a hit and shrink.
- Companies will frequently try to reduce their expenditures by reducing their headcount, consequently closing shop in some of the properties that they might have leased. Unoccupied space in buildings goes a long way in affecting the amount of rental income that REITs generate, significantly affecting cash flows available for payouts.
High debt levels
- A higher dividend payout forces most REITs to pursue an unnecessary debt in an attempt to expand real estate holdings. High debt levels may lead to more interest going out, thus reducing the amount payable in the form of dividends.
- One of the major risks with REITs is that most of them don’t have a diversified portfolio of property holdings. Most REITs specialize in a single property type which could be either be residential property, healthcare property, or office property.
- A downturn in one industry, be it in healthcare or retail sector, would most of the time affect their performance when it comes to rental income generated.
Business interruptions risks
- Any calamity or natural disaster that has the potential to cause business interruption goes a long way in affecting the performance of REITs. Things like hurricanes, fires, and geopolitical tensions result in mass evacuation, significantly affecting rental income streams.
- Anything that affects the ability of businesses to operate, or individuals to live in a particular area, makes it impossible for REITs to generate the desired rental income for higher payouts.
Competition from Airbnb
- REITs with stakes in the hotel industry have started to feel the pinch on the emergence of the likes of Airbnb, among other entrants. Such services are increasingly diverting business from hotels significantly, affecting their occupancy rates thus rental income generated.
- A study carried out shows that third-party internet travel companies pose the biggest threat to the revenue of hotel REITs.
Singapore’s best REITs to invest in
Ascendas is by far the biggest real estate investment trust in Singapore. The REIT specializes in industrial property. Being the largest, the REIT has also returned the most to investors since its IPO in 2002. Estimates indicate that every $1,000 investment in the trust since 2002 would have generated $3,140 including dividends.
Its recent earnings report indicates year-over-year growth in both revenue and net income, thanks to high occupancy rates. In the fourth quarter, the company reported revenues of S$862.1 million, representing a 3.8% increase. Net property income was up 3% to S$629.4 million.
Distribution per unit in the quarter rose 1.5% to 3.91 cents. The REIT’s occupancy rate improved to 91.5% from 90.2% a year ago.
CapitaLand Mall Trust
CapitaLand Mall Trust is the second largest REIT by market capitalization in Singapore. The real estate investment trust invests in and owns income producing assets used for retail purposes. The REIT owns some of the biggest properties in the sector including Clarke Quay, Junction 8 and Plaza Singapore.
The REIT has been one of the top performers in the industry as every S$1,000 invested since 2002 could have generated S$2,010 inclusive of dividends.
In the fourth quarter, the REIT reported a 1.8% increase in revenue that came in at S$175.2 million. Net property income grew 4.7% to S$125.7 million. Distributable income to unitholders increased 2.1% to S$99 million as Distribution per unit grew from 2.73 cents to 2.78 cents.
The occupancy rate at the end of the quarter stood at 98.9%, a drop from 99.2% as of the end of last year.
Suntec Real Estate Investment Trust
Suntec Real Estate Investment Trust is another most sought after REIT in Singapore. The company owns a portfolio of properties both in Singapore and Australia. Some of its high profile assets include Suntec City, One Raffles Quay, and three other properties in the Marina Bay Financial Center.
In the most recent quarter, the REIT reported net property income of S$63 million versus S$61.8 million reported a year ago. Gross revenue was up S$90.7 million versus s$88.4 million. The REITs distribution per unit at the end of the quarter stood at 2.43 cents.
The REIT has, however, come under pressure in recent past given the dynamic retail scene in the country, a problem compounded by a high supply of office spaces.
Mapletree Commercial REIT
Mapletree sums up the top five largest real estate investment trusts in Singapore. The commercial retail deals with office buildings with its crown jewel being Vivocity a retail mall. Its portfolio comprises of five properties located in Singapore.
The company posted impressive fourth-quarter results whereby Distribution per unit rose to 2.28 Singapore cents from 2.26 cents as income rose 0.4% to S$64.8 million. Gross revenue in the fourth quarter was up 1.3% to S$108.9 million helped by a high contribution by Vivocity and Bank of America Lynch HarbourFront.
|REIT||SGX Code||Total Return YTD %||Dividend Yield|
|CapitaLand Mall Trust||C38U||11.8||5.5|
|CapitaLand Commercial Trust||C61U||22.2||5.4|
|Mapletree Commercial Trust||N21U||15.7||5.7|
|Mapletree Industrial Trust||ME8U||17.8||6.2|
|Viva Industrial Trust||T8B||29.6||7.9|