Why are REITs so popular?
The Singapore Stock Exchange currently has 38 listed Real Estate Investment Trust (REITs) or more commonly known as S-REITs. REITs are traded like any other listed equities. The business model of a REIT is to acquire solid rental generating real estate with growth potential. REITs have a high dividend yield as more than 90% of distributable income is usually paid out to unitholders and stand to benefit from being completely exempted from income tax should they opt to have a higher than 90% payout ratio and this has attracted many investors into the asset class.
Key Investment features of REITs:
- Granted full tax exemption provided at least 90% of distributable income is distributed to unitholders.
- Investors are able to get regular dividend distributions, either every financial quarter or semi- annual dividend payment. Moreover, dividends from REITS are non-taxable.
- Relatively high dividend yields, in the range from 6%-9% per annum, based on current entry market price.
- Do not require a huge excessive outlay of capital to gain exposure to commercial property investment, as its units can be sold to another ready buyer at the stock exchange. However REITs’ trading volume and liquidity are comparatively less active than normal stock counters as REITs could be seen as dividend play counters.
Singapore REITs withstood the recent financial crisis in 2008 as its ability to declare dividends was not adversely affected (distribution was partially lowered for certain REITs). Investors who had taken the opportunity by accumulating REITs when prices were depressed during that period would have effectively locked in an attractive yield and are currently sitting on decent capital gains.
By investing in REIT, property management and tenant management duties are carried out by professional managers, which saves us the hassle of direct property investment. REITs listed in Singapore could be said to be relatively stable, with low fluctuation in prices as long as yields are maintained and backed by solid rental income. MAS is always on the forefront by introducing guidelines which can better offer protection to investors.
Key investing criteria for evaluating a REIT
- Dividend Yield
Dividend yield is measured by dividend distributed to shareholders over average price of REIT bought from the market.
- Gearing levels
Gearing levels are measured by the total debt to total asset value of a REIT. A gearing ratio of 50% is the maximum permissible level of gearing in that a REIT’s bank borrowings could not exceed 50% of the REIT’s total assets, in which majority are real estate properties and their corresponding asset value.
- Distribution per unit growth
A lot of focus is placed on dividends as the major source of income for REIT unit holders, so unitholders often look out for yield accretive property acquisitions by the REIT managers that would enhance DPU growth.
REITs have an underlying property profile
REITs’ underlying property type generally falls under one the following categories, namely Industrial, Retail, Office Commercial, Hospitality and Residential.
Industrial REITs include AIMS AMP Capital REIT, Ascendas REIT, Cache Log Trust, Cambridge Industrial Trust, EX World REIT, Frasers Logistics and Industrial Trust, Mapletree Industrial Trust, Mapletree Log Trust, Sabana REIT, Soilbuild Business REIT, Viva Industrial REIT, EC World REIT and Keppel DC REIT. Industrial properties include warehouses that are used as storage centres for the logistics companies, specialized factories located in key industrial areas and special purpose data centres.
REITs which own some of the well-known local malls, or properties with a retail focus, include BHG Retail REIT, Capitamall Trust, Fortune REIT, Frasers Centrepoint Trust, Lippo Malls Trust, SPH REIT and Starhill Global REIT.
Commercial REITs include CapitaCommercial Trust, Frasers Commercial Trust, IREIT Global, Keppel REIT, Manulife REIT, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, OUE Commercial REIT and Suntec REIT. These REITS hold prime office towers in choice locations, usually in Central Business District of each major global city where the property is situated.
Hospitality REITs include Frasers Hospitality Trust, Far East Hospitality Trust, OUE Hospitality Trust, Ascendas Hospitality Trust, CDL Hospitality Trust, and Ascott REIT. These REITS holds hotels which are tied closely to tourist arrivals and occupancy rates from business and leisure travellers.
Then there are residential REITs like Saizen REIT. These REITS operates in a niche segment where the underlying properties are serviced apartments available for rent for short term and long term stays targeting expatriates and business travellers.
There are also REITS with special purpose buildings under their management like hospitals and nursing centres which include Parkway Life REIT and First REIT. The buildings are modeled for use as a general purpose hospital complete with operation rooms and medical beds for patients seeking medical treatments.
Why buy S-REITs?
It pays for investors to look into investing in Singapore listed REITS for the long term, as they offer attractive dividend yields and access to prime real estate assets located in all over the world. It has the potential to rival direct real estate investment in terms of returns where the yields are significantly higher than current market interest rates. Investors could start off by investing with REITs with a local presence ie having a Singapore real estate exposure before scaling up to include REITs with a global presence. The returns would be rewarding for knowledgeable REIT investors.
In my next article, find out which are the Top 8 S-REITs to invest in.