Everything you ever wanted to know about REITs investing in Singapore is here.
Property ownership has always been associated with wealth. Contrary to perception, owning property is easy, given the many products available that one can use to own a piece of a high-value real estate property. 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 on the fact that they return at least 90% of their disposable income to shareholders. Their dividend yields are usually higher than what is on offer in other investments.
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 buying it.
What Is a REIT?
Simply put, Real Estate Investment Trusts (REITs) are companies that own and sometimes operate a portfolio of real estate properties such as apartment’s, warehouses malls and 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 real estate property. The generated income is normally distributed to shareholders in the form of dividends.
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.
Types of REIT
This type of REITs invest in shopping malls and freestanding retail. Mot shopping centers are owned by REITs which generate money from 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.
They 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.
They 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 sector, 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 a 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 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 right management teams and the quality of their properties is usually based on up 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 open market are deposited. The account can be opened by going to 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 like 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 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 REIT’s 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 piece of a REITs holdings.
A REIT worth investing 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 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
The main attraction to REITs compared to other investments is their high dividend yields. 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 most of the time it is 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.
REITs cash flows is 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 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 is 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 most of the time takes a hit and shrinks.
Companies will most of the time try to reduce their expenditure 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 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 the 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 Hotel REITs revenue.
So what do we think?
Real estate investment trusts are suitable for constructing an equity or fixed income portfolio. Their ability to generate dividend incomes as well as capital income makes them ideal as a counterbalance to other investments. They also provide greater diversification in an investment portfolio.
If you invest in a REIT with a good investment team and proven track record, then you are sure to sit back and watch as your investment grows.