It was recently reported that Far East Organization, a leading Singapore real estate developer, was planning to raise more than S$500 million via a Real Estate Investment Trust (REIT) by listing some of its hotel and serviced apartment assets next year.
Indeed Singapore’s REIT market has been growing with a number of new listings despite the volatile market as investors are attracted to the prospect of the stable yields that these securities can provide. In this article we’ll examine what REITs are, the type of yields you can get from them and their performance, and what to look out for when investing in them.
What are REITs?
A REIT is a tax-advantaged corporate vehicle that is used to provide a real estate investment structure that can accommodate a wide variety of investors, similar to what mutual funds do with stocks. In this way even a retail investor can get exposure to real estate with just a small outlay. REITs are usually required to pay out more than 90% of their taxable investors as a distribution to investors.
There are currently around 27 REITs and Business Trusts with real estate exposure listed in Singapore, with a market cap of around S$40 billion. Singapore REITs (S-REITs) are a relatively recent phenomenon with the first one (CapitaMall Trust) listed in July 2002.
What sort of yields can you get from Singapore REITs (S-REITs)?
On average the S-REITs are trading at about 6% yield, but they range from 4+% to 9+%. At the lower end of the yield range are the “blue chip” names such as CapitaCommercial Trust and CapitaMalls Trust, which tend to be large, liquid and have ownership of a large portfolio of quality assets. For example, CapitaMall Trust’s assets include Plaza Singapura, IMM, Bugis Junction and Tampines Mall. At the higher end of the range are the smaller and riskier names such as AIMS and Cambridge Industrial Trust.
In general office and retail REITs tend to trade at lower yields than industrial and logistics REITs as their rental income stream tends to be more stable and less volatile, especially during economic downturns.
From a capital gains perspective, so far this year the S-REITs as a whole have been relatively flat, with the retail names such as Starhill Global and Frasers Centrepoint slightly outperforming, and the office names such as Capitacommercial Trust and and KREIT Asia slightly underperforming.
What should you take note of when investing in REITs?
Before you start investing in REITs, there are several issues you need to take note of:
1. Composition of REIT assets
REITs are typically classified according to the type of assets they are comprised of: retail (i.e. shopping malls), office, industrial, diversified or specialized such as hotel or healthcare REITs. Each type of asset has its own characteristics and have different drivers that will determine how they perform. For example, how well a hotel REIT performs depends on the number of tourist arrivals.
2. Geographic diversification and currency risk
REITs are not just comprised of different types of assets, but these assets could also be located in different countries, such as Singapore, Hong Kong, Indonesia, China, and Japan. If the REIT does not hedge this currency exposure, then the investor could be exposed to currency risk, so a strong Singapore dollar could lead to translation losses when the overseas incomes are converted back to pay the dividend.
3. Growth of Dividend Per Unit (DPU)
A good REIT will not only have a high and stable yield but one that is also growing over time. The main source of a REIT’s income is rental, and so you have to also consider how that rental will grow over time. This will depend on factors including GDP growth, and also what sort of rental increases are built into the lease contracts.
4. Spread over 10 year Government Bond yield
If REITs are trading at yields that are too close to the Government Bond yield (which is risk free), then the investor might not be being compensated sufficiently for that risk. The bigger the yield spread that REITs are trading over Government Bonds, the more potentially attractive they are.
REITs are allowed to borrow up to 35% of their total assets without a credit rating from a major rating agency. If REITs are heavily geared (leveraged) this creates a risk that they may run into serious problems if financing becomes an issue, as we saw during the Great Financial Crisis. Also any potential acquisitions that they do have to be done through raising equity (e.g. through a rights issue) instead of just borrowing more to pay for it.
REITs are a good way to get exposure to a diversified portfolio of commercial properties and to enjoy an attractive dividend yield, but do not come without investment risks. Please do your homework before investing!