6 Questions to ask before you invest in a REIT
With the increasing attention on REIT investment in Singapore, there is a need to beware of the pitfalls of pouring your hard earned money in REITs without knowing how they would affect you. At the same time, the benefits of investing in REITs are too good to miss as the many benefits of REITs over a physical property have been explained before.
Given that Singapore remains one of the world’s largest REIT (Real Estate Investment Trust) markets and one of the largest in Asia, alongside the likes of Hong Kong, Japan and Australia, the pros and cons of investing in a REIT need to be examined more extensively before you can make a firm decision on what to do with your money.
The popularity of REITs
Apart from the fact that it is much safer to invest in a REIT than in any single property whose value may plummet due to market corrections or changes in regulations, there are the benefits of liquidity, diversification of asset classes, reduced hassle with management and administrative issues (e.g. collecting rent and attending to a tenant’s issues) when investing in a REIT than in a physical property. There are a lot of other reasons that REITs investing remain popular that are too numerous to discuss here.
Here are some questions you should ask before you decide to invest in a REIT.
Is there enough diversification in my portfolio?
While investing in a REIT is attractive enough to earn popular attention, there is the risk that an investor may not diversify his/her investments by pouring all their money on REITs. Another factor to consider is geographical distribution. Some REITs are exposed to only a single country or a tiny number of countries.
On the flip side, an added advantage from investing in REITs is that all forms of properties are invested in no matter if they are residences or if they are industrial or commercial spaces.
Is it volatile?
Contrary to popular belief, REITs are not investments that deliver steady returns all the time. There can be volatility in the market but in the long run, REITs are expected to deliver more steady and possibly, higher returns. In fact, in the year to date, REITs have generated 17.6% returns, on average, compared to 14.8% for the STI. If you expect REITs to deliver a steady stream of constant and bountiful returns every year, you may be in for a shock.
Factoring volatility of REITs in before you invest in any REIT would be a prudent idea.
How will I be taxed?
Unlike stocks that pay out dividends, REITs pay out distributions. In simpler terms, if you invest in a stock and the stock pays out any earning to its stock holders, the payment is called dividend. In the case of REITs, the same payment is called distribution. Essentially, these are two different names for the same concepts.
In Singapore, distributions of REITs are not subject to taxes. However, REIT ETF (Exchange Traded Funds) are taxed at about 17% in the form of corporate taxes. For REITs involving overseas listed entities, a withholding tax may also be applied on distributions earned from there.
What other fees would I incur?
Being mindful of the various fees that come with investing in a REIT or even a REIT ETF would be advisable. These fees include management fees, trustee fees, legal fees, administration fees, audit fees, transaction fees and even brokerage fees for the sale and purchase of these REITs.
How will market forces affect my distributions?
Market conditions impact different segments of REITs. So it may be wise to consider their impact, such as the declining retail market in Singapore, on distributions of retail-related REITs. It has been widely documented that retail in Singapore has been declining for the last few years and yet, commercial REITs have continued to deliver market beating performances.
This may be explained by the exposure of Singapore REITs to global markets and also the fact that Singapore’s economy has been experiencing slow growth due, partly, to slowing or declining consumer spending. In years to come, with the emergence of a host of national and international e-commerce players that threaten the very existence of traditional shopping centres, an eye needs to be kept on the distributions (earnings) paid out by REITs.
What is the long term outlook?
Volatility is an inescapable aspect of any financial market. REITs are known to exhibit volatility as we have seen before. At the same time, it has turned out to be a truth that within Singapore and around the world, REITs have delivered performances better than the market in general. This was seen in all parts of the world.
In Singapore, for the year to date, the returns from REITs of 17.6% have exceeded the returns of 14.8% from the STI index by a comfortable margin. If you can stick with a reliable and well diversified REIT for the long haul, chances are high that you will earn high returns even though high returns are not guaranteed, much like any other form of investment.
Whether to part with your money for a Singapore REIT (S REIT) is your decision and only for you to make. Before doing so, these six questions may be worth pondering over.