Tips On How To Invest In REITs In Singapore
Singapore has one of the most lucrative and mature property markets and this has been one of the major wealth-making vehicles for many people in the country. This is because most families in the country have that mentality of owning their own homes rather than paying rent.
Singapore’s real estate market has therefore seen a lot of investors join the market and this has over the past few years led to the surge in prices, making it more difficult for the average person to invest in the market. One would need a large sum of cash to invest in the market but there is a better alternative called real estate investment trusts (REITs) that makes it possible for people to invest in the market without requiring large investments.
What are REITs?
REITs are investment companies that act as trusts that allow investors to come in and create a pool of funds that are then invested in diverse property portfolios. They provide an easier alternative for investing in the stock market without requiring a hefty initial investment. Singapore has about 35 REITs that are spread out across the healthcare, hospitality, industrial, office, and retail sector.
Some of the most popular REITs in Singapore include REIT Ascendas which is an industrial REIT and a retail REIT called CapitaLand Mall Trust which is popular in the country because it has a chain of shopping malls that are “cloned.”
How REITs operate In Singapore
REITs present opportunities to invest in properties that are managed by the REIT firms. REITs are listed as companies in Singapore which means that people can invest in them in the same way that they buy shares in publicly listed companies. Investors, therefore, get to partly own the property that is controlled by the REIT. Investors are paid dividends if the properties owned by the REIT earn any rental income.
In order for REITs to operate in Singapore, they have to be in line with stringent regulatory measures such as putting a 25 percent maximum limit on development activities. They also have to maintain a gearing of 45 percent or more and they are supposed to pay out over 90 percent of their income.
Features of a good REIT
Like many other investment options in the market, investors have to exercise caution before investing in REITs. This means that they have to carry out research to determine which REIT is ideal to invest in and as such there are some considerations that need to be made in order to minimize risks. Here are some of that investors should look out for.
- Avoid REITs that are overvalued
Like any other investment opportunity, investors in Singapore should make sure that they carefully analyze the valuation of REITs to avoid investing in those that are overvalued. REITs depend on the underlying real estate asset in order to generate revenue and sometimes investors usually end up paying too much when their target REIT is overvalued.
- Ideal REITs should be characterized by a positive outlook
Any REIT that is a good target for investors should be characterized by a positive or good investment outlook in the subsectors in which they exist. The outlook can be influenced by economic trends and macro trends such as regulatory trends and interest rates.
- A satisfactory cap rate
An ideal REIT should not only have a good dividend yield but should also be characterized by a good capitalization rate. This refers to the rate of return for the investment property based on the anticipated income to be generated. The cap rate is often confused with the distribution yield especially because of how similar they are when determining the REITs ability to generate income.
What to avoid as a REIT investor
It would not be a complete guide if we pointed out the characteristics of REITs without mentioning the things that should be avoided when investing in them.
- Do not select a REIT that has a poor macro-economic outlook
Investing in REITs is quite similar to investing in real estate and this means that they are also affected by economic influences and their macro outlooks. Each of the subsectors of REITs as mentioned earlier has different outlooks depending on the economic factors that affect them.
Investors should focus on putting their wealth or investments into REITs that demonstrate significant potential for growth. Although CapitaLand Mall Trust is one of the popular ones, investors should consider selecting other options such as Keppel DC REIT which have a clearer growth outlook.
- Do not choose REITs By Dividends offered
Although this sounds like the wrong piece of advice, it is important to note that some REITs promise high dividends to attract more investors but this does not necessarily mean that they will pay out as much as promised. The quality of the REIT is what matters in order to make sure that it performs well enough to facilitate good dividend payouts.
- Do not choose REITs that are characterized by high gearing
Gearing ratio refers to the amount of debt that a REIT owes over the total assets under its control. Most REITs rely on debt finance to facilitate the acquisition of new real estate properties. In such cases, investors often end up being exposed to interest rate risk where their earnings are negatively affected as the loan interest rates of the REIT increase.
What investors should expect from REITs
Choosing a REIT is, therefore, a bit of a process but in order to get it right, investors have to focus on the ones that are managed properly. This increases the chances of consistent returns and this consistency should always be prioritized over high dividend yields. Investors should also read the prospectus of their preferred REIT to determine whether it aligns with the level of risk that they are willing to take and also to determine how long they plan on remaining on board as investors.
Once investors have carefully selected the ideal REIT, they should expect around 6 percent to 7 percent returns on their investment annually and the dividends should be paid out either quarterly or bi-annually. This is possible because the law dictates that they should pay out at least 90 percent of their taxable income to their investors.