SINGAPORE (Jan 15): If you are new to the stock market, real estate investment trusts, or REITs, are a good place to start.
Why, you ask? Even if you do not keep up with stock market news, you should already be familiar with names such as Ascendas REIT, CapitaLand Commercial Trust, Keppel REIT, and Mapletree Industrial Trust. You might even frequent some of the properties owned by these REITs.
Dream of owning a piece of Capital Tower, Suntec City, or 313@Somerset? REITs let you dive into real estate without having to invest too much capital.
To get you started, here are some things you need to know about investing in REITs.
What are REITs?
REITs are companies that own and operate a portfolio of properties. Profits generated via these assets are distributed among unitholders in the form of regular dividends.
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Why should REITs be a part of your investment portfolio?
REITs are generally popular among investors as they offer fairly attractive long-term returns and provide a source of stable income that is tax-deductible.
In short, REITs are an affordable means to own property. It is also easier to buy and sell units in a REIT, without having to worry about Additional Buyer’s Stamp Duty (ABSD) and other such taxes.
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As REITs are legally required to re-distribute at least 90% of their taxable income to their shareholders, they offer higher dividend yields as well. According to DBS, Singapore REITs, or S-REITs, offer yields of 6%, compared to 3.8% for the Straits Times Index, 2.1% for 10-year bonds, and 1% for term deposits.
REITs are not completely risk-free, though. While their dividends may be attractive, they are just as likely to lose money once the economy goes into recession, when interest rates rise, or when property prices dip. When that happens, you may have to sell your REITs at a loss.
How much should you invest in REITs?
There is no fixed rule, although it should be part of your “core portfolio” or long-term investments, according to a paper by DBS.
The actual percentage of REITs in your portfolio is also determined by your investment risk tolerance.
How to decide which REIT to invest in?
Each REIT typically focuses on a specific sector, such as healthcare, retail, office, hospitality, or data centre assets.
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Accordingly, each faces different driving factors and risks.
When looking for a REIT to invest in, you should also look at its business outlook, performance history, and industry trends, on top of its annual dividends.
Consider hospitality REITs, for instance. The average length of stay in Singapore is two to three days. As a result, hotel room revenues fluctuate and are not as stable as, say, that of shopping malls or office buildings, which have longer leases and therefore offer greater income visibility.
Other factors to consider in a REIT
- Yield
- How much dividends you will be receiving.
- You will want to buy low, and sell high, to make more money out of the REIT.
- Consider the performance history and track record of the company managing the REIT.
- Take a closer look at the REIT’s portfolio of properties: how many assets are there, where are they located, and what are they used for. You will also need to look at the REIT's portfolio occupancy rate, and weighted average lease expiry (WALE), which is a metric used by investors to determine the likelihood of properties in the REIT's portfolio being vacant.
- What is the proportion of equity and debt the REIT is using to finance its assets? Highly leveraged companies run a higher risk of bankruptcy if the business declines. According to DBS, a good debt-to-equity ratio -- calculated by total liability divided by total equity -- is between 1 and 1.5.
- This is used to measure the risk of a REIT's portfolio going vacant. It is measured by years; the longer a REIT's WALE is, the better.
How to start investing in REITs?
You can invest in REITs like you do with other stocks listed on the SGX using your CDP and brokerage accounts. Similarly, you can choose to buy or sell units in the REITs at any time.
The S-REIT model
There are two models of management for REITs: the internal model, which is being practised by the US, and the external model, which is practised by other countries such as Singapore and Australia.
In an internally managed REIT, the REIT employs the manager and support staff instead of outsourcing the task to an outsider. On the other hand, an externally managed REIT operates like a fund, with the manager being a third party that earns a fee for managing the REIT.
The S-REIT or Singapore model comprises a developer-sponsor such as CapitaLand, Mapletree Investments or Frasers Property listing its REIT with a portfolio of income-producing properties. The developer then supports the REIT by taking up a stake in the REITs that ranges from more than 20% to 40% or more in some cases.
Equity raisings by the REIT for acquisitions are supported by the sponsor with a “backstop”, or safety net. The sponsor commits to taking its pro-rata allotment and sometimes underwrites the capital raising.
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