By guest contributor Calvin Yeo (reproduced with permission from his blog www.investinpassiveincome.com)
Before we begin, let’s start with the definition of REITs. REITs are corporate entities which invest primarily in real estate and have various tax benefits. To qualify for the tax benefits, a REIT is required to distribute at least 90% of their taxable income to unit holders. This rule is very important as since most of the profits are paid out as dividends, REITs do not retain much of the profits for debt redemptions, asset enhancement initiatives (AEIs) or acquisitions.
The first thing to understand about Singapore REITs (SREITs) is that they invest in different types of properties. The classes of properties include office, retail, office/retail hybrids, industrial, healthcare, hospitality and residential. Each class is very different from one another, and have varying rental yields, defensiveness of rentals, prospects for rental increases, Weighted Average Lease Expiry (WALE) periods, leverage ratios and so on.
Healthcare REITS – Very High Defensiveness / Medium Dividend Yields / Very Long WALE
Examples: Parkway Life REIT, First REIT
Healthcare REITs are the most defensive REITs on the Singapore Stock Exchange. However, there are only 2 healthcare REITs listed currently: Parkway and First. Healthcare REITs have extremely long leases with hospitals, ranging from 10-20 year leases. These leases may also have guaranteed rental increases built in, hence the upside for these REITs are also guaranteed regardless of the economic environment.
Healthcare is a basic necessity which cannot be foregone no matter how bad the economy is as people still need to go to hospitals and see doctors. First REIT focuses on Indonesian hospitals; however, the rentals are denominated in Singapore Dollars, so there is little foreign exchange risk. Healthcare REITs should be a part of everybody’s stock portfolio.
Industrial REITS (General Industrials / Warehousing) – Medium Defensiveness / High Dividend Yields / Long WALE
Examples: Ascendas REITs, Cache Logistics Trust, Cambridge Industrial Trust, Mapletree Logistics Trust, Mapletree Industrial Trust, Sabana REIT.
Industrial REITs are a good balance of defensiveness and high dividend yields of between 6%-10%. Industrial REITs can be loosely categorized into 2 types: general industrial properties and warehousing properties. REITs like Cambridge Industrial Trust, Mapletree Industrial Trust are more focused on general industrial properties, which are mostly used for manufacturing purposes. REITs like Cache, Mapletree Logistics Trust are focused on warehousing properties which typically serve logistics purposes.
The difference between the two usually lies in the WALE. Warehousing trusts typically have longer WALEs of 5 years or longer, while general industrial REITs may have WALEs of 3-4 years. Warehousing trusts are therefore usually more resilient, but the tradeoff is rentals are locked in for longer periods, and hence they may not be able to take advantage of a rising rental environment.
Retail REITS – High Defensiveness / Medium Dividend Yields / Medium WALE
Examples: CapitaMall Trust, Fraser Centerpoint Trust, LippoMall (Indonesia Only)
Retail REITs are very defensive, in particular the REITs which are purely suburban mall plays such as Fraser Centerpoint Trust. Even in a downturn, shoppers still need to go shopping and buy their daily necessities, eat and watch movies etc.
Typical dividend yields for retail REITs stand at about 5%-7%. What you give up in yields, you get in terms of resilience of rentals and hence stable distributions. For investors who are highly risk-averse, retail REITs are one of the top choices. In fact, even during the 2008/2009 period, retail rentals did not really drop and occupancy rate remained high for most of the shopping malls.
It is also quite easy to determine the performance of the properties under the REITs, you just go shopping in them! There’s nothing better than a physical site inspection to ensure the malls are well run, have brisk business for tenants, crowd traffic is good and so on. Retail REITs also tend to benefit a lot from asset enhancement initiatives (AEI) as seen from the recent asset enhancements at Causway Point to update the mall and make it more attractive, bringing more visitors and raising the rentals as well.
Office REITS – Low-Medium Defensiveness / Medium-High Dividend Yields / Medium WALE
Examples: Frasers Commercial Trust, CapitaCommercial Trust, Keppel REIT
Office REITs are generally one of the least defensive REITs you can invest in. Office assets typically suffer from oversupply in Singapore. Suitable office locations are mushrooming all around Singapore and many companies these days may not see the need to be located in the city.
Even Grade A offices may lose substantial tenants as many companies choose to cut costs when the rental gets too expensive in the city center. Another factor to consider is that many of the tenants in the city are European/American financial companies which are bearing the brunt of this 2008-2011 financial crisis, hence downsizing is possible. In the 2008/2009 financial crisis, office rental yields dropped substantially, affecting distributions dramatically.
Retail / Office Hybrid REITS – Medium-High Defensiveness / Medium-High Dividend Yields / Medium WALE
Examples: Mapletree Commercial Trust, Starhill REIT, Suntec REIT
As the name suggests, these REITs are typically integrated developments which have both offices (and sometimes residential) on top of the shopping mall like Vivocity, Suntec etc. Depending on how much of the rental is derived from the office versus the shopping mall, the defensiveness and yields lie in between that of offices and retail.
Mapletree Commercial Trust has Vivocity as the key asset, Starhill has Takashimaya and Wisma Atria and Suntec REIT has Suntec Convention Center and Shopping Mall. Hybrid REITs are good to own especially if you have limited capital as the REIT itself already benefits from being diversified with Retail/Office/Residential assets. You get defensive qualities of the retail and still enjoy large upside on office rentals when the economy booms.
Hospitality REITS – Low Defensiveness / High Dividend Yields / Low WALE
Examples: Ascott REIT, CDL Hospitality Trust
Hospitality REITs are typically made up of hotels and serviced residences. These REITs are probably the most cyclical of all the REITs as hotel occupancy rates are based on tourist arrivals.
Ascott REIT has a large percentage of its portfolio worldwide and is thus more subject to the global economy. CDL Hospitality Trust on the other hand is more focused on Singapore hotels. Given the huge boost in tourist arrivals from the two Casinos, first F1 night race in the world and many other initiatives, tourist arrivals to Singapore look poised to continue booming.
However, a global downturn may dampen tourism as well. For CDL Hospitality in particular, it does not make sense to look at WALE, but at average occupancy rates and average room rates as key metrics instead. Both are key beneficiaries if global tourism industry is to improve.
Residential REITS – Low-Medium Defensiveness / Low-High Dividend Yields / Short WALE
Example: Saizen REIT (Japan Only)
Saizen REIT is the only pure play residential REIT listed on the Singapore exchange. My experience with Singapore rental properties that lease expiry profiles are low, with many tenants leaving after the 1 year contract is up. With the high tenant turnover in residential properties in Singapore, I hardly think they make good investments for REITs. Hence Saizen REIT only invests in Japanese residential properties.
While I am not familiar with Japanese properties, what I hear is that many Japanese do not have the means to buy houses and hence may rent a house for most of their lives, unlike Singaporeans who can buy affordable HDBs. However, Saizen has defaulted on a loan before, incurring extremely high default costs. You should study the REIT very carefully if you are interested.
So in summary, ranking by various qualities:
- Defensiveness (From Highest to Lowest) – Healthcare, Retail, Retail/Office Hybrid, Industrial, Office, Residential, Hospitality
- Dividend Yields (From Highest to Lowest) – Hospitality, Residential, Office, Industrial, Retail/Office Hybrid, Retail, Healthcar
- Weighted Average Lease Expiry (WALE) (From Highest to Lowest) – Healthcare, Industrial, Retail, Retail/Office Hybrid, Office, Residential, Hospitality
You can see dividend yield is pretty much inversely correlated to defensiveness.
Please note that this is just a general guide as REITs may have different risk levels due to other factors like strong sponsors, access to capital, debt rating, leverage ratio, quality of management, location of properties and so on.
Further analysis is required to understand the REITs before investing. Different categories of REITs offer different qualities you may be interested in. A good portfolio should always be diversified with different kinds of REITs. Now that you understand the categories better, you can tweak your portfolio percentages based on your risk profile. For example, if you are more risk adverse, you may want to have a higher percentage of your portfolio in healthcare and retail. If you are willing to take more risks, you may want to have a higher percentage of your portfolio in industrial, office and hospitality.
Guest contributor Calvin Yeo is the founder of the Making Passive Income blog. He graduated with a Business Major in Finance and Accounting and spent a few years working in an investment bank. The knowledge from his studies and working experience serve as a good base for him to grasp the ideas for passive income generation.