It was recently reported that Far East Organization, a leading Singapore real estate developer, was intending to raise more than S$500 million thru a Real Estate Investment Trust (REIT) by listing some of its hotel and serviced flat assets next year.
Indeed Singapore’s REIT market has been growing with numerous new lists in spite of the changeable market as financiers are drawn to the possibility of the stable yields that these instruments can provide. In this article we’ll inspect what REITs are, the sort of yields it is easy to 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 company car that’s utilized to provide an estate investment structure that may accommodate a wide selection of stockholders, like what retirement funds do with stocks. In this fashion even a retail financier can get exposure to property with merely a little outlay. REITs are usually required to pay out more than 90% of their taxable investors as a distribution to investors.
There are at the current time around 27 REITs and Business Trusts with real-estate exposure listed in Singapore, with a market cap of about S$40 bill. Singapore REITs (S-REITs) are a relatively contemporary phenomenon with the first one (CapitaMall Trust) listed in July 2002.
What type of yields can you get from Singapore REITs (S-REITs)?
On average the S-REITs are trading at 6% yield, but they range all the way from 4 % to 9 %. At the low end of the yield range are the “blue chip” names like CapitaCommercial Trust and CapitaMalls Trust, which tend to be large, liquid and have possession of a large portfolio of quality assets. For instance, CapitaMall Trust’s assets include Square Singapura, IMM, Bugis Junction and Tampines Mall. At the higher end of the range are the littler and riskier names such as AIMS and Cambridge Business Trust.
Generally office and retail REITs tend to trade at lower yields than commercial and logistics REITs as their rental income stream has a tendency to be more established and less unpredictable, particularly during business downturns.
From a capital gains viewpoint, so far this year the S-REITs in total have been comparatively flat, with the retail names such as Starhill Worldwide and Frasers Centrepoint a touch outperforming, and the office names such as Capitacommercial Trust and KREIT Pacific Rim a little underperforming.
What do you have to take note of when making an investment in REITs?
Before starting making an investment in REITs, there are several issues you want to take note of:
1. Composition of REIT assets
REITs are typically classified according to the type of assets they are made up of: retail (i.e. Shopping malls), office, economic, diversified or specialized such as hotel or health-care REITs. Each kind of asset has its own traits and have different drivers which will work out how they perform. For example, how well a hotel REIT performs depends upon the amount of tourist arrivals.
2. Geographic diversification and currency risk
REITs are not just composed of different types of assets, but these assets could also be found in different nations, such as Singapore, HK, Indonesia, China, and Japan. If the REIT doesn't hedge this currency exposure, then the financier might be exposed to currency risk, so a powerful Singapore greenback can lead to interpretation losses when the overseas incomes are converted back to pay the dividend.
3. Expansion of Dividend Per Unit (DPU)
A good REIT will not just have a high and stable yield but one that is also growing over a period. The primary source of a REIT’s earnings is rental, and so you've got to also consider how that rental will grow over time. This will depend on factors including GDP expansion, and also what kind of rental increases are built into the lease contracts.
4. Spread over 10 year Govt. Bond yield
If REITs are trading at yields that are too close to the Executive Bond yield (which is risk free), then the financier may not be being compensated sufficiently for that risk. The larger the yield spread that REITs are trading over State Bonds, the more possibly fascinating they are.
5. Gearing
REITs are permitted to borrow up to 35% of their total assets without a credit history 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 a problem as we saw during the Great Financial Disaster. 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 engaging dividend yield, but do not come without investment risks. Please do your studies before investing!
Hope that you enjoyed reading this Singapore property market article!
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