An Overview of Investing in REITs in Singapore
In this article, find out everything you need to know about Singapore REITs, the various types of popular REITs in Singapore, and what you have to prepare before investing in REITs.
Owning properties and collecting rental income while simultaneously enjoying capital appreciation, seems like a dream for many. However, the barriers to entry for owning properties from different parts of the world can be extremely high due to government regulations and the large amount of upfront capital required.
Fortunately, there are ways to gain exposure to real estate investments across geographies or within Singapore, without this large upfront cost. One way would be to invest in real estate investment trusts (“REITs”).
What are REITs?
REITs are real estate companies that invest in income-producing real estate. Each REIT has a REIT manager, which is responsible for acquiring and managing the assets within the REIT, and carries out duties that include property management, asset management, investor relations. financing, fundraising, and handling legal and tax matters. REITs work in a similar manner as mutual funds, such that a pool of capital is collected from investors for investing in an asset or a portfolio of assets.
In the case of REITs, such assets can either be investment properties, or in less common cases, real estate mortgages or debt. Investors in REITs are not responsible for managing the properties; and unless they are major shareholders, they are also unable to influence the management and decision-making of the REIT.
Similar to the Singapore Savings Bonds, investors are usually paid dividends through the rental income collected by the REIT. REITs are usually listed on the stock exchange and publicly traded. However, it is worth noting that there are private REITs in countries such as the United States and Japan.
You can participate in a REIT investment just like how you would invest in a stock, that is, by getting a broker to invest for you, or by purchasing it yourself through a custodian or Central Depository Account through the stock exchange. One of the defining features of a REIT is the tax benefits offered under the REIT structure. In Singapore, rental income for REITs is not taxable at the corporate level if the REIT distributes at least 90% of its net income to shareholders.
Read also: REITs or Real Estate Co-Investments?
How do you profit from a REIT?
When investing in a REIT, investors can make money through the dividends REITs are required to pay out at regular intervals, as well as any share price appreciation. These dividends and share price appreciation can vary based on the REIT’s performance over the investor’s holding period. But historically, better-performing REITs can provide investors with total returns of between 5% and 10% per annum.
Types of REITs
There are three main types of REITs, globally.
These are the most common types of REIT. Equity REITs invest in various types of income-generating property, such as hotels, offices, retail malls or residential housing.
All REITs in Singapore are equity REITs, and we will learn more about equity REITs (specifically Singapore REITs) in a subsequent section of this article.
As the name suggests, this type of REIT invests in mortgages. Mortgage REITs (“M-REITs”) profit from interest collected through mortgage loans. They are highly sensitive to interest rate fluctuations and credit risk. In Singapore, however, there is no mortgage REIT.
These REITs combine both investment strategies of equity REITs and mortgage REITs. They generate income from rents and interest collected from mortgage payments.
Types of S-REITs
At this point, all the REITs listed on the Singapore Exchange (“S-REITs”) are equity REITs. S-REITs invest in a wide range of real estate sectors, ranging from the more mainstream office, retail, industrial, logistics, and hospitality, to alternative sectors, such as healthcare and data centres. Typically, a REIT will choose to specialise in a particular sector of the real estate market and use their domain expertise to continue growing within that market. The following are a few examples of the different types of equity REITs available in Singapore.
Commercial or office REITs
Office REITs own and manage office spaces. They generate income through acquiring and renting out offices to different companies that require workspaces for their employees. When deciding whether to invest in an office REIT, important factors to consider include the macroeconomic fundamentals of the locations the REIT has holdings in. Other factors to note include current vacancy levels, as well as any upcoming office supply, as this could affect the rents the REIT is able to collect.
Selected commercial or office S-REITs:
- OUE Commercial REIT
- Keppel Pacific Oak US REIT
- Manulife US REIT
- IREIT Global
- Suntec REIT
- CapitaLand Integrated Commercial Trust (traded separately as CapitaLand Mall Trust and CapitaLand Commercial Trust until the merger of CMT and CCT in October 2020)
- Keppel REIT
Read also: Asset Type – Ins and Outs of Office Real Estate
Read also: Suntec REIT Overview | Keppel REIT Overview
These REITs typically own industrial, business park or logistics assets. The properties managed by these REITs include factories, business parks, warehouses, and distribution centres. With the exception of multi-tenanted light industrial assets, industrial properties are generally heavily customised to suit specific tenants.As such, occupiers of most industrial properties tend to have longer-term tenancies. It may take a long time to find a new tenant for any vacant space, and the landlord will have to incur costs in customising and re-fitting the industrial space to meet the needs of the new tenant. Land tenure is another important factor for industrial S-REIT managers to consider. In Singapore, almost all industrial land is owned by the government and sold with land tenures far shorter relative to other land zonings.
Selected industrial S-REITs:
- Soilbuild Business Space REIT
- ARA LOGOS Logistics Trust (traded as Cache Logistics Trust until April 2020)
- ESR REIT
- EC World REIT
- Sabana Shari’ah Compliant Industrial REIT
- AIMS APAC REIT
- Frasers Logistics & Commercial Trust
- Ascendas REIT
- Mapletree Industrial Trust
- Mapletree Logistics Trust
Read also: Implications of COVID-19 Aftermath on Real Estate Sectors
Read also: Ascendas REIT Overview
Retail REITs own shopping malls, outlets, big box retailers and other shopping spaces. Income is generated from the retailers taking up retail premises and paying rents on their leases.
While the general concept of a retail REIT is intuitive and easy to understand, they are in fact relatively more challenging to evaluate for several reasons. Unlike the office or industrial sector where rents tend to be fixed, retail rents often include a percentage of a retailer’s turnover, which potentially results in higher income volatility for the REIT.
Moreover, the heterogeneous nature of retail real estate makes comparables analysis more difficult. Given the competition from e-commerce and changing consumer behaviour, investors in a retail REIT will also need to evaluate how vulnerable their REIT’s portfolio of assets will be, in response to the changing e-commerce landscape and how successful the REIT manager’s strategy will be in adapting to those changes.
Selected Retail S-REITs:
- Lippo Malls Indonesia Retail Trust
- Starhill Global REIT
- Sasseur REIT
- SPH REIT
- BHG Retail REIT
- Frasers Centrepoint Trust
Read also: Understanding IRR, Cash Yield, and Equity Multiple
Read also: Sasseur REIT Overview
Hotels and serviced apartments are the staple of hospitality S-REITs. Unlike office, industrial and retail REITs, hospitality REITs are an investment in both the physical real estate asset as well as the hotel management company, as hotels are an operational real estate class which requires active management of the asset. As such, investors will also need to evaluate the strength of the hotel or serviced residence operator when investing in hospitality REITs.
Additionally, the shorter leases in the hospitality sector where rooms are booked on a nightly basis, combined with seasonality in travel trends, make hospitality investments one of the most volatile real estate classes.
Finally, like the retail sector, REITs in the hospitality sector also face threats from industry disruption, with the advent of online hospitality platforms such as Airbnb.
Selected hospitality S-REITs:
- Frasers Hospitality Trust
- CDL Hospitality Trusts
- Far East Hospitality
- Ascott Residence Trust
- ARA US Hospitality Trust
Read also: Knowing Your Capital Stack
Read also: Ascott REIT Overview
Healthcare REITs invest in medical and healthcare facilities such as hospitals, medical centres and nursing homes. By and large, healthcare makes for an attractive investment theme, due to its non-discretionary nature and it is an investment that is also well-supported by long-term structural demographic tailwinds.
Similar to hospitality, healthcare is also another operational real estate sector and investors will need to evaluate the strength of the healthcare operator. Moreover, the healthcare system and policy changes in a country can exert significant influence over the performance of a healthcare REITs that has assets within that country.
Finally, investors of healthcare REITs should note that their asset class is not immune to technological disruption, as the growth in telemedicine might see more people choosing online medical consultations over in-person medical consultations over time.
Healthcare REITs in Singapore:
Read also: How Does Internal Rate of Return (IRR) Impact Real Estate Investors' Decision-Making Process?
Read also: Parkway Life REIT Overview
Key features of S-REITs
S-REITs are exempted from taxes on the corporate level, as long as 90% of an S-REIT’s taxable income is issued to shareholders within three months before its financial year-end. The tax exemption helps to avoid double taxation (at both REIT and individual levels), allowing unitholders to enjoy higher distributions per unit (DPU).
Low leverage risk
Because S-REITs are designed to provide retail investors with access to real estate investments, which would otherwise be out of reach, regulators have decided to restrict the leverage of S-REITs to 50% of their asset value. This is to manage leverage risk and reduce the risk of a REIT breaching its debt covenants.
High level of transparency
REITs listed on regulated stock exchanges such as the Singapore Exchange (“SGX”)) are subject to high disclosure requirements, due to the reporting obligations associated with a stock listing. As such, listed REITs are obligated to provide regular financial and corporate updates and detailed financial information to their investors. Investors in listed REITs are also invited to attend annual general meetings (AGM), where they can interact with the executives of the REIT manager and table any questions they may have.
Ease of liquidity
As listed entities, REITs are publicly traded like stocks, which makes them more liquid and easier to transact compared to physical real estate.
Read also: Six Critical Success Factors in Direct Property Investment
Barriers to entry for REIT investments are far lower than physical real estate as the minimum investment required is 1 lot or 100 units. As such, REITs provide an affordable alternative for investing in real estate by removing the high upfront costs typically associated with traditional real estate investments.
Read also: Knowing Your Capital StackSign Up at RealVantage
Pros and cons of investing in REITs
Like all investment options, investing in REITs has its pros and cons. The benefits of investing in REITs include passive income in the form of dividends (which REITs are required to pay out in order to maintain their REIT status), as well as the potential capital appreciation if the REIT’s shares increase in value.
However, as REITs are restricted in the amount of leverage they can take on, REIT managers may have to issue more equity to fund further acquisitions, if they are near their debt limits. This additional equity raising can have a dilutive effect on existing shares and cause the REIT’s share price to fall, hurting the existing REIT investors.
How to analyse a REIT
When choosing a REIT, it is important for an investor to consider which sector the REIT operates in and the effectiveness of the REIT’s management. Like all stocks, a REIT’s ability to withstand market volatility will depend on its underlying investment portfolio, the structural fundamentals of the market it operates in, as well as the strength of its management company.
Understanding the fundamentals of the real estate industry is important for investing in REITs. The following indicators are often used to assess the market.
Landlords of equity REITs receive income from rents. As such, higher occupancies mean more rents are collected, compared to a building with more vacant units.
Additionally, higher occupancies mean that tenants have less alternatives to choose from, and that gives landlords more leverage in raising rents. To get a sense of occupancy trends, investors may check out the research reports from real estate brokerages, such as JLL, CBRE, Knight Frank, Savills and Colliers, among others., which track vacancies, rents and yields for different real estate markets.
2) Net absorption
Net absorption amounts indicate the net volume of real estate being leased in a particular time frame, and is an important indicator of tenant demand. Sustained net absorption in markets with little to moderate upcoming supply translates to increasing occupancy rates and an upward pressure on rents.
3) Upcoming supply pipeline
Real estate is unique in that it can take considerable time for new supply to enter the market. This longer lead time provides greater visibility on upcoming supply, which could potentially depress rents if demand does not keep up with the pace of supply; and investors should take note of this.
4) Price trends or rental trends
Empirically, property markets move in cycles and sharp dislocations are relatively rare. When considering a particular REIT investment, investors should note where the REIT’s assets sit within their respective property cycles.
Again, research reports from real estate brokerages are good sources of information for investors to understand where the respective market that they are invested in sits within the property cycle.
5) Tenant mix and profile
The tenant’s creditworthiness is critical to the security of rental payments. Investors should therefore scrutinise the REIT’s tenant mix and profile to ensure that the tenant base is sufficiently diversified and that the anchor tenants are financially viable.
6) Weighted Average Lease Expiry occupancy
Weighted Average Lease Expiry (WALE) is a metric that measures the average time it takes for all leases in the property to expire. A longer WALE is more desirable, as it provides investors with a longer-dated income stream. WALE is usually weighted by each tenant’s lettable area. For example:
Tenant A: Takes up 50% of the building’s lettable area with 5 years to lease expiry
Tenant B: Takes up 30% of the building’s lettable area with 3 years to lease expiry
Tenant C: Takes up 20% of the building’s lettable area with 7 years to lease expiry
WALE is computed as: 0.5 x 5 + 0.3 x 3 + 0.2 x 7 = 4.8 years. Therefore the weighted average time it takes for all leases in the building to expire is 4.8 years.
7) Sponsor's background
Within Asia, most REITs are backed by a sponsor, whose main role is to support the REIT through sourcing and supplying properties. Moreover, sponsors often hold shares in the REIT they are sponsoring and are sometimes the largest shareholder of that REIT.
Having a strong sponsor allows a REIT to have access to a good pipeline of assets, as the sponsor will usually sell the properties it has developed or acquired for the REIT, once the asset has stabilised. The REIT could potentially tap on financing assistance or income support from its sponsor, especially if the sponsor is in a stronger financial position than the REIT.
Finally, having a strong sponsor which also owns shares of the REIT, carries weight within the capital markets and lends support to a REIT’s fundraising and financing activities.
Read also: Definition of Accredited InvestorSign Up at RealVantage
Risk factors relevant to REITs
Due to its mandatory leverage limitations and dividend payout requirements, REITs are usually seen as less risky investments, especially when compared to other stocks. Even so, investing in REITs is not completely risk-free and here are some potential risks investors will need to consider:
1) Market risk
As a listed investment vehicle, publicly-traded REITs are exposed to general stock market volatility. Historically, REIT shares have closely tracked the overall equity market performance, and this has potentially undermined their diversification value within a personal investment portfolio.
The inflation-hedging properties present in most real estate investments might also not materialise in a REIT, if general stock market volatility leads to a slide in REIT share prices.
Read also: The Real Estate Risk/Reward Spectrum & Investment Strategies
2) Dilution risk
Because REITs are mandated to pay out 90% of their earnings as dividends, they often have little to no retained earnings to fuel future growth. Due to their mandatory leverage restrictions and little cash on hand, REITs often have to turn to the equity markets to raise fresh capital, thereby presenting existing unit-holders with potential dilution risk each time more shares are issued.
This dilutive effect may put a drag on potential share price appreciation and distribution per unit, especially when a REIT’s financial statements show that it is nearing its gearing limitations.
Read also: What is Cap Rate?
3) Misalignment of the REIT manager’s incentives
Part of the REIT manager’s compensation is usually tied to the size of a REIT’s portfolio or assets under management (AUM). This sometimes results in certain REIT managers becoming overly-aggressive in growing their REIT’s portfolio. These aggressive expansionary measures could be to the detriment of shareholders’ interests, if they were to backfire.
4) Conflict of interests between REIT sponsors and unitholders
The sponsor often has a unique position as a separate company, which sells its own stabilised assets to the REIT. As mentioned earlier, it may also own shares of that same REIT or even be the REIT’s largest shareholder. This complex relationship can sometimes result in conflict of interests between the sponsor and unitholders of the REIT.
For example, the sponsor could be trying to maximise the price of the asset it is selling to the REIT, while unitholders would want the REIT to be purchasing the asset at the lowest possible price. In the past, it was also not unusual for REIT managers to be rewarded with shares of the sponsor’s company, and the close relationship between the sponsor and the REIT manager often resulted in the executives of the REIT manager being promoted to positions within the sponsor company.
Given the above, some shareholders may wonder whether a REIT manager’s interests ultimately lie: in its unitholders or sponsor?
Read also: Doing Right by Our Investors
5) Rise of market disruptors
Like many industries, real estate has not been immune to technological disruption. Amazon, Alibaba, and Airbnb are just some examples of technology companies that have changed the real estate investment market.
The wide reach of Amazon and high e-commerce penetration in many developed countries has made online shopping a habit for many consumers, and this has been creating knock-on effects on shopping malls, high street stores, and other retail real estate which have found it harder to attract tenants. This has, in turn, affected retail rents and retail real estate valuations, as well as the share prices of retail REITs.
Alternatively, the technological revolution has also created demand for new real estate investments, with logistics centres and data centres both benefiting from our increasingly technology-focused lives. Savvy investors should note that no market is immune to disruption (be it from technology or changes in lifestyle preferences), and should always scan for potential opportunities or threats to their REIT holdings.
How can you start investing in REITs?
You may start investing in REITs by first opening an account with any brokerage. Examples of such brokerages would include POEMS (by Phillip Securities), DBS Vickers, UOB Kay Hian, and FSMOne. In selecting a brokerage, the investor should compare the minimum commission fees and funding required and opt for one that best suits their needs and investing style.
Once you have opened your brokerage account, you may use the relevant platform to start investing in REITs by purchasing shares in your preferred REIT. In Singapore, the minimum investment requirement is one lot, which is equivalent to 100 units of a REIT.
Alternative real estate investment options
Notwithstanding the benefits of REIT investments (that is, high liquidity, low barriers to entry, relative transparency, etc.), there are also drawbacks to REITs, which may result in investors considering other ways of investing in real estate.
For example, in addition to the risks mentioned earlier, such as volatility risk and dilution risk, REITs only offer investors exposure to core investment strategies, as the asset they invest in is usually already stabilised.
As such, REIT investors will not be able to access riskier real estate investment strategies, which have the potential for higher returns, such as Value-Add and Opportunistic real estate investments. These two strategies often see investors having to reposition or develop real estate assets, which may produce higher returns if managed successfully, even though it is riskier to execute.
Of course, REITs are not the only way you can invest in real estate assets. Here are other alternative real estate investment options you may consider as well:
Owning physical real estate
Owning physical real estate is the most traditional form of real estate investing and can take many forms (from a simple residential unit to a large mixed-use development), limited only by the investor’s wealth and investment expertise. However, due to the high upfront capital required, this method of investment would be out of reach for most retail investors.
Read also: Market Selection in Real Estate - RealVantage’s Approach
Co-investing in real estate
Real estate co-investing is a concept that has been growing in popularity. Unlike traditional real estate investing, which usually has a limited and small number of investors, real estate co-investing pools capital from many smaller investors to access real estate opportunities, which would otherwise be out of reach, as they are less affordable or more complex.I
n real estate co-investing, deal sourcing and due diligence are done by an investment management company, on behalf of the investors. Suitable investments are screened by the investment management firm and then offered to the investor pool to invest in. Each investor owns a portion of the asset prorated to the size of their investment.
For more information, please refer to our article: REITs vs Real Estate Co-Investing to see a comparison of the two types of investment.
While REITs are a good way for retail investors to gain exposure to real estate investments, they also come with their own set of limitations. To build a robust investment portfolio, investors should also consider alternative options, such as real estate co-investments, to augment their real estate investment strategy.Sign Up at RealVantage
Frequently asked questions about REITs
Ways to invest in REITs
Besides the conventional method of directly investing in REITs, investors may also invest in a REIT ETF, which allows them to receive returns from all the REITs in the fund, allowing for diversification and reduced risk.
Alternatively, investors may also invest in a REIT portfolio, which is made up of a combination of REITs, reducing the time required to individually assess and select REITs for investment. For example, the SGX iEdge S-REIT Leaders Index is made up of the 20 largest REITs in Singapore, with investment returns generated from each REIT within a single portfolio.
Where can I invest in REITs in Singapore?
You may invest in REITs just like how you would invest in any stock, either choose a broker to invest in your desired REITs or create a CDP account and invest in REITs through a brokerage platform.
Here are some brokerage platforms where you can invest in REITs through:
How do REITs make money?
Equity REITs usually make money through rental income. Hospitality and healthcare REITs usually earn extra income through the services they provide.
How much should I invest in S-REITs?
The amount to invest highly depends on your financial situation and your investment objectives. REITs are not high growth stocks but they do generate higher dividend yields, as compared to other asset classes. As such, if you are planning for your retirement and have a large cash reserve, you may consider investing in REITs to benefit from the dividend payouts.
Why are REITs a good investment?
This is subjective. Some people may think REITs are a good investment, as they may have compared them with other high volatile asset classes, such as equities. Some may think that REITs are a better investment because they pay out substantial dividends. However, as mentioned above there are risks involved when investing in REITs, and it is up to you to conduct your own due diligence to analyse a REIT before you invest in it.
How do I value REITs?
There are many ways to analyse a REIT and there is no perfect way of doing it, because at the end of the day, REITs are still subject to exogenous market influences, which may affect its performance. Here are some common ways to value a REIT:
1) Net Asset Value (NAV)
The Net Asset Value (“NAV”) is the summation of all the assets in a REIT minus its liabilities. You may obtain this information from the yearly or quarterly balance sheet published by the REIT. Sum up the total assets of the REIT (cash, properties, accounts receivable) and deduct its liabilities (debt, accounts payable, taxes payable) and, divide the total value by the amount of shares issued, and you will get a good sense on whether you are overpaying for a particular REIT or a discount.
2) Dividend yield
Dividend payout is an attractive feature of a REIT. To compare your yield return with other REITs, we usually use percentage yield to measure how “profitable” your REIT is.
Dividend yield = (annual dividend payout per share) *100% / share price
The higher your dividend yield, the higher the return on your investment.
Using both NAV and dividend yield, you can get a good gauge of your return on investment from investing in a particular REIT. It is also imperative that you analyse the market conditions and the management team of the REITs, before investing in any REIT.
What is DPU?
Distribution per unit, or DPU, is the amount of cash you receive annually for every unit of a REIT you own.
What is WALE?
Weighted Lease Average Expiry (WALE) is a popular metric used in real estate to measure the length of the time taken for the leased space of a REIT portfolio to be unoccupied by tenants assuming that all tenants do not renew their current lease. A high WALE gives investors’ confidence in investing in a property or a REIT.
Find out more about real estate co-investment opportunities at RealVantage. Visit our team, check out our story and investment strategies.Sign Up at RealVantage
RealVantage is a real estate co-investment platform that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.
Visit our main site to find out more!
Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.