Table of Contents
- What are REITs?
- How Do You Profit from a REIT Investment?
- Types of REITs
a. Equity REITs
b. Mortgage REITs
c. Hybrid REITs
- Types of S-REITs
a. Commercial/Office REITs
b. Industrial REITs
c. Retail REITs
d. Hospitality REITs
e. Healthcare REITs
- Key Features of S-REITs (Singapore - Real Estate Investment Trusts)
a. Tax Exemption
b. Low Leverage Risk
c. High Level of Transparency
d. Ease of Liquidity
- Pros and Cons of Investing in REITs
- How to Analyse a REIT
- REITs Risk factors
- How Can You Start Investing in REITs?
- Alternative Real Estate Investment Options
a. Owning Physical Real Estate
b. Co-Investing in Real Estate
- Frequently Asked Questions about 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, or even within Singapore, can be extremely high due to the large amount of upfront capital required.
Thankfully, there are ways to gain exposure to real estate investments across geographies or within Singapore, without this large upfront cost. One such way is to invest in REITs.
What are REITs?
REITs, or Real Estate Investment Trusts, are real estate companies which 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 including property management, asset management, financing, fundraising, and the handling of legal and tax matters. REITs work in a similar manner as mutual funds whereby a pool of capital is collected from investors to invest in an asset or portfolio of assets.
In the case of REITs, such assets can either be investment properties, or in less common cases, real estate mortgages. Investors in REITs are not responsible for managing the properties and unless they are major shareholders, are also unable to influence the management and decision-making of the REIT.
Similar to 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 found in countries such as the United States of America (USA) and Japan.
You can participate in a REIT investment just like how you invest in a stock i.e. by getting a broker to purchase for you, or by purchasing it yourself through a custodian or Central Depository Account (CDP) 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 Investment?
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 from any share price appreciation the REIT experiences. These dividends and share price appreciation can vary based on the REITs performance over the investor’s holding period, but historically, better-performing REITs can provide investors with total returns of between 5 to 10% per annum.
Types of REITs
Globally, there are 3 main types of REITs.
These types are the ones which we are most familiar with as they are the most common type of REIT. Equity REITs invest in income-generating property of various types such as hotels, offices, or residential housing.
All REITs in Singapore are equity REITs. We will learn more about equity REITs (more specifically S-REITs) at a later section.
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. (There are no mortgage REITs found in Singapore).
This class of REITs combines both investment strategies of Equity REITs and Mortgage REITs. This type of REIT generates income through rents and from interest collected from mortgage payments.
Types of S-REITs
At this point, all REITs listed on the Singapore stock exchange (also known as “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, through to more 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. Below are a few examples of the different types of equity REITS available in Singapore.
Office REITs own and manage office spaces. They generate income through acquiring and then renting out offices to different companies that require work spaces 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/Office S-REITS:
- 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
These REITS typically own industrial, business park or logistics assets. The properties managed include factories, business parks, warehouses, and distribution centers. With the exception of multi-tenanted light industrial assets, industrial properties are generally heavily customised to suit a specific tenant.
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 retailers taking up retail premises and paying rents on that.
While the general concept of a retail REIT is intuitive and easy to understand, retail REITs are in fact relatively more challenging to evaluate for several reasons. Unlike the office or industrial sectors where rents tend to be fixed, retail rents often include a percentage of a retailer’s turnover, therefore potentially resulting in greater 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 to changing e-commerce 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
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 is an investment which 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 on the performance of healthcare REITs which have 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 eschew in-person medical consultations for online ones.
Healthcare REITs in Singapore:
Key Features of S-REITs (Singapore - Real Estate Investment Trusts)
S-REITs are exempted from being taxed at the corporate level as long as 90% of the REIT’s taxable income are issued to shareholders within 3 months before financial year-end. The tax exemption helps to avoid double taxation (at both REIT and individual levels), allowing unit holders to enjoy higher distributions per unit (DPU).
Low Leverage Risk
Because S-REITs are designed to give retail investors 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 SGX (Singapore Stock Exchange) 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 investors. Investors in listed REITs are also invited to attend annual general meetings (AGM) where they can interact with executives of the REIT manager and table any questions they might 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.
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 have pros and cons attached to them. Benefits include the provision of passive income in the form of dividends (which REITs are required to pay out in order to maintain their REIT status), and potential capital appreciation should the REIT’s shares increase in value.
However, as REITs are restricted in the amount of leverage they can take on, REIT managers might have to issue more equity to fund further acquisitions should they 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, thereby hurting 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 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.
As landlords, equity REITs receive income from rents. As such, higher occupancies mean more rents collected compared to a building with more vacant units.
Additionally, higher occupancies mean that tenants have less alternatives to choose from, thereby giving landlords more leverage in raising rents. To get a sense of occupancy trends, investors can check research reports from real estate brokerages such as JLL, CBRE, Knight Frank, Savills, Colliers etc., which track vacancies, rents and yields for different real estate markets.
2) Net Absorption
Net absorption amounts indicate the 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 upward pressure on rents.
3) Upcoming Supply Pipeline
Real estate is unique because it can take considerable time for new supply to enter the market. This longer lead time provides greater visibility on upcoming supply that could potentially depress rents should demand not keep pace, and is worth investors taking note of.
4) Price Trends / 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 their respective market sits within the property cycle.
5) Tenant Mix and Profile
The tenant’s creditworthiness is central 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 anchor tenants are financially viable.
6) WALE (Weighted Average Lease Expiry) Occupancy
WALE is a metric that measures the average time it takes for all leases in the property to expire. A longer WALE is considered superior 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 property. 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 the REIT to have access to a good pipeline of assets as the sponsor will usually sell property it has developed or acquired into 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 that also owns shares of the REIT it sponsors 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
REITs Risk factors
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 need to consider:
1) Market Risk
As a listed investment vehicle, publicly-traded REITs are exposed to general stock market volatility. REIT shares have historically closely tracked overall equity market performances, thereby potentially undermining 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 meant that REIT share prices similarly traded downwards.
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 can limit potential share price appreciation, especially when the REIT’s financial statements show it 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 REIT’s portfolio or assets under management (AUM). This sometimes results in certain REIT managers becoming overly-aggressive in growing their REIT’s portfolio, to the detriment of shareholders should such aggressive expansion measures backfire.
4) Conflict of Interest between REIT Sponsors and Unit-holders
The sponsor often has a unique position as a separate company which sells its own stabilised assets into the REIT. As mentioned above, it might also own shares within that same REIT and might even be that REIT’s largest shareholder. This complex relationship can sometimes result in conflict of interests between the sponsor and unit-holders of the REIT.
For example, the sponsor could be trying to maximise the price of the asset it is selling to the REIT, whereas the unit-holders of the REIT 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 results in executives of the REIT manager being promoted to positions within the sponsor company.
This has resulted in some shareholders wondering where a REIT manager’s interest ultimately lies: towards its unit-holders or to its 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, with Amazon, Alibaba, and Airbnb being some examples of technology companies which have changed the real estate investment market.
For example, the reach of Amazon and the high e-commerce penetration in many developed countries has meant that online shopping has become a habit for many consumers, with knock-on effects on shopping malls, high street stores and other retail real estate which have found it harder to attract tenants. This in turn affects retail rents which then affect retail real estate valuations and 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 and/or threats to their REIT holdings.
How Can You Start Investing in REITs?
Start investing in REITs by first opening an account with any brokerage. Examples of such brokerages include POEMS (by Phillips Securities), DBS Vickers, UOB Loh 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 the investor has opened their brokerage account, they may use the relevant platform to start investing in REITs by purchasing shares in their selected REIT or REITs. In Singapore, the minimum investment requirement is 1 lot or 100 units per REIT investment.
Alternative Real Estate Investment Options
Notwithstanding the benefits of REIT investments (i.e. –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 above 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 are unable 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, while riskier to execute, can also produce higher returns if managed successfully.
Below are some alternative real estate investment options:
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 through 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 is out of reach to most retail investors.
Co-Investing in Real Estate
Real estate co-investing is a concept which 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 due to affordability or investment complexity.
In real estate co-investing, deal sourcing and due diligence is 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 pro-rated 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 investment types.
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 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 purchase 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.
How to Purchase REITs in Singapore?
You can purchase REITs just like how you purchase any stock, either choose a broker to purchase your desired REITs or create a CDP account and purchase REITs through a brokerage platform.
Here are some of the brokerage platform where you can purchase REITs:
How do REITs Make Money?
Equity REITs usually make money through rental income and management management fee. For hospitality and healthcare REITs they usually earn extra income through services which they provide.
How Much to Invest in S-REITs?
How much to invest highly depends on your financial situation and your investment objectives. REITs are not popular for their capital appreciation but they do return higher amounts of dividend yield as compared to other asset classes. As such, if you are planning for retirement and you have a large cash reserve, you may consider investing in REITs as you can enjoy the dividend payouts.
Why are REITs a Good Investment?
This is a subjective opinion. People may think REITs are a good investment as they may have compared with other high volatile assets classes such as the equity market. Some may think that REITs are a better investment because they pay out substantial dividends. However, as mentioned above there are risks behind investing in REITs, it is up to you to do your due diligence in analysing a REIT before investing.
How to Value REITs?
There are many ways to analyse a REIT and there is no perfect way of doing it, because in the end of the day, REITs are still subjected to exogenous market influences which can affect its performance. Here are some common ways to value a REITs:
Net Asset Value (NAV)
NAV is the summation of all the assets in a REITs, you can get this information from the yearly or quarterly balance sheet published by the REIT company. Sum up the total cash reserve and all the income generating properties, divide the total value by the amount of shares issued, you can get a good sense on whether you are overpaying for a particular REIT or you are getting a discount.
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
Higher dividend yield, the more your return on investment.
Using both NAV and Dividend yield you can get a good gauge on your ROI through buying a particular REITs, but do analyse the market condition and the management team of the REITs before investing in any.
What is DPU?
Distributed per unit (DPU) similar to dividend yield, it is the amount of cash receive annually for every unit of REIT you own.
What is WALE?
Weighted Lease Average Expiry (WALE) is a popular metric used in real estate, to measure the probability of the time taken for a unit to be unoccupied by tenants. A high WALE gives investors confidence in investing in a real estate or REITs portfolio.
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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.