How to Invest REITs in Singapore: A Step-By-Step Guide
What are Singapore REITs?
Real Estate Investment Trusts (REITs) provide an easy way of diversifying an investment portfolio with exposure in the real estate industry. Singapore REITs are listed companies that pool capital from investors to invest in real estate properties. Not only do these types of investments produce excellent returns, but they also act as excellent portfolio diversifiers.
By buying units of a publicly traded REIT, investors get to enjoy the benefits of owning large-scale income-producing real estate, with a small amount of capital and without the headaches or expenses that come with being a landlord.
The Monetary Authority of Singapore regulates REITs in Singapore and determines that they have to pay out at least 90% of their taxable income every year in the form of dividends to its unitholders. REITs in Singapore paid the highest yields in the region last year at an average of 5.9% compared to 5.7% in Hong Kong and 3.3% in Japan.
Dividend payout ratios, management quality, and corporate structure are some of the factors to watch out for when it comes to REIT investments.
Here’s what you need to know about investing in a REIT in Singapore.
Unlike companies, REITs invest in commercial properties that generate rental income. REITs may acquire property with a view of leasing them for rental revenues or decide to develop properties from scratch.
REITs are required by law to distribute their taxable income because they don’t incur ‘double taxation’ as is the case with other investments. These investments don’t incur corporate tax thus the reason why they offer above-average dividends.
REITs also offer an opportunity for capital appreciation. It is for these reasons that they are considered strong-income generating investment.
Know the different types of REITs
There are different types of real estate trusts even though all of them invest in real estate properties. The difference usually comes down to sectors of focus. For example, there are REITs that specialize in properties in the retail sector that includes, malls, shopping centers, outlets and freestanding retail.
Lippo Malls Indonesia Retail Trust is one of the best performing real estate investment trust in Singapore. The REIT specialises in mall portfolios located in prime districts. Its FY2016 dividend yield stood at 8%. BHG Retail REIT is another top performing REIT with prime shopping malls in China. Its dividend yield as of last year’s stood at 7%.
CDL Hospitality Trust provides investors with exposure to property portfolios in the global tourism industry. First REIT on the other hand specialises on property in the health industry comprising of hospitals and nursing home properties.
What to Look for When Investing in a REIT
Just like other investments, markets reward REITs that demonstrate consistent earnings, dividend growth, and higher price-earnings ratio. A good REIT investment is one that demonstrates the ability to increase earnings reliably and consistently.
While interest rates influence a great deal of the performance of real estate investment trusts, a worthy investment is one that is not highly susceptible to such fluctuations.
A good REIT should also have properties in areas where rents are below market levels. Such properties come with a higher upside potential in stable markets. They also provide protection in case of economic slowdowns. REITS with a reliable management team able to quickly and effectively reinvest available cash flow, guarantee good returns on investments.
Understand a REIT’s Evaluation Metrics
Traditional accounting methods may not accurately reflect the income and valuation of a worthy real estate investment trust. There are unique metrics that are used to analyse the performance and long-term prospects of a REITs. Funds from Operations is one of the metrics commonly used to ascertain the valuation of a REIT.
Funds from operations is a measure of cash generated as an operating measure. This metric takes into consideration the net income of a REIT minus gains or losses of real estate depreciation. It is similar to earnings in other types of investments.
REITs with higher earnings tend to generate higher revenues at relatively lower operating costs. Higher revenues come from higher rates of building occupancy and increased rents.
Risk Reward Ratio
Just like other forms of investments, REITs come with their own share of risks. It is important to understand the risks that might come into play before putting any money to work with REITs investment. Interest rate fluctuations pose the biggest risk when it comes to REITs investments.
Interest rates hikes create downward pressure on REITs by essentially making capital borrowing expensive. Such hikes result in higher interest expense that reduces cash flow paid to investors in the form of dividends.
Depending on the sector of operation, risks associated with different types of REITs vary. As some types of real estate tend to be more defensive, others do well in strong economies while other get hit hard in times of economic recession.
Healthcare REITs tend to do extremely well in tough times, given that people need to see doctors. It is common practice for healthcare facilities to sign long-term leases, which reduces vacancy risk.
Hospitality REITs struggle a lot in times of recession because of the impact of forces of demand and supply. Fluctuations in rental rates, as well as price of hotel rooms, is a common occurrence which affects cash flows as well as dividend returns of Hospitality REITs.
REIT dividends are usually taxed at a rate of up to 39.6%. For this reason, they usually make an excellent candidate for tax differed and tax free retirement accounts.
Step By Step Guide to Investing In REITS in Singapore
Step 1: Open A Brokerage Account And CDP Account
The first requirement to trading real estate investment trusts in Singapore involves opening an account with a reputable broker as well as opening an SGX Central Depository account. You can open a brokerage account with either, DBS, UOB, OCBV and banks such as Standard Chattered, Maybank and CIMB.
Once everything is set up, you will need to know the code of a REIT you are interested in, to purchase it via an online brokerage platform.
Step 2: Understand Your Financial Position
After sorting out a brokerage and CDP account, you will need to analyze your financial commitments to ensure you have sufficient funds for investing. Prior to investing anything on REITs, ensure you have set aside adequate budget to cater for monthly expenditure and unexpected emergencies.
Step 3: Grasp Risk, Returns and Diversifications
Just like other investments, REITs investment has its fair share of risks that any investor has to grasp prior to investing anything. Setting goals on the expected returns is also key, depending on the investment. Diversification is also key to ensure risks are spread so that when one investment is down it is well supported by another.
Step 4: Review your Investment Portfolio
Reviewing of investments regularly is key to ensuring they perform to expectations. This would also be the perfect time to trim investments that are incurring huge loses.
【Check these 「REITs」 Articles, too! 】
・Which Singapore REITs Offer The Best Returns in 2018? (A Comparison Table)
・What’s the difference between a business trust and a REIT? Quite a lot.
・Everything you ever wanted to know about REITs investing in Singapore is here.
・REITS Investment: Does It Benefit The REIT Manager More Than It Benefits Me?
・How do interest rates affect REITs anyway?