A Real Estate Investment Trust (REIT) is a company that owns or finances income-generating real estate. In this current day, investors can choose from a variety of REITs whose underlying real assets are properties housing commercial, retail, hospitality, and even industrial businesses. Recently, medical facilities and data centres have been added to the mix. A particular REIT does not have to specialise in one area and could also own properties tenanted by businesses from other sectors.
REITs are set up in a way which allows investors to access real property assets. A prime benefit would be income. REITs around the world have been given favourable tax conditions by resident governments and hence are able to distribute to shareholders a large amount of their rent collected from tenants. This amounts to Global REIT dividend yields dwarfing global equity yields and global government bond yields (chart 1).
REITs are typically listed on a stock exchange, is liquid and traded like any other security. Hence, should investors be optimistic about the prospects of the underlying assets, the stock prices of REITs could go up. Investors are therefore able to benefit from both income collected and stock price appreciation.
Due to the ongoing global hunt for yield, investors have been naturally interested in the ability of economies in Asia Pacific ex-Japan to generate globally beating yields. It is therefore no surprise that listings of Asian REITs have grown strongly over this decade. Within the S&P Asia Pacific Ex-Japan REIT index, the total number of listed REITs have increased by 36% and the market capitalisation has grown by 122% from 2010 to June 2019.
However, despite its remarkable growth trajectory, there remains significant potential for REITs across the Asia Pacific region. Longer term themes like globalisation and urbanisation are paving the path for increased infrastructure, growing economic activity and rising consumption. Additionally, there is a huge opportunity for global investors to participate in government asset recycling programmes. In these initiatives, governments are selling physical assets to the market to make funds available for fiscal spending needs. Governments tend to sell these assets at attractive valuations to encourage investment in the sector. This presents an enormous opportunity for global investors.
The success of Singapore REITs
Singapore, which launched its first REIT in 2002, has 35 REITs, six stapled trusts and two property trusts and at the end of 2019. This is incredible growth for a country without a large land base. Two areas have propelled the growth of Singapore REITs.
Firstly, the yield of Singapore REITs are relatively high when compared to global REIT yields (chart 2). This is made possible as Singapore REITs are required to distribute at least 90% of taxable income each year to enjoy tax exempt status.
Secondly, the country’s political stability, advantageous tax regime and proven legal system makes it particularly appealing for international investment trusts. To gain an edge in this area, Singapore authorities understand that they must be commercially flexible and open to updating its regulations. For example, overseas investor participation increased when withholding taxes were reduced recently. Other adjustments currently under consideration include changes to debt levels, part ownership of assets and improvements in disclosure requirements and corporate governance practices.
Singapore is currently home to both foreign and local REITs from healthcare, hospitality, office, residential, retail, data centres and industrial sectors.
One REIT with the right stuff
Mapletree IndustriaI Trust (MINT) is a REIT involved in the ownership and management of industrial properties across Singapore and North America. In terms of total value and square footage, most of the company’s real estate portfolio comprises multi-tenanted flatted factories, hitech buildings, and business park buildings. MINT generates revenue in the form of rental income derived from the leasing of its industrial facilities in medium- to long-term leases. The company’s flatted factories account for the majority of this rental income. MINT’s customer base encompasses a variety of companies engaged in manufacturing and wholesale and retail trade activities. In addition, MINT recently acquired stakes in data centres in the US and Canada. Management understands that broadening its reach is key to achieving stable cash flow through its 114 properties, which has stable and high occupancy rates (chart 3) and a large diversified tenant base of more than 2,200 tenants across different sectors (chart 4).
Financially, MINT looks to be in great shape with rising earnings and free cash flow (FCF) over the last five years (chart 5). This has led to relatively high dividends and growing distributions (charts 6&7).
Management has also exhibit prudence in producing a strong balance sheet where gearing is at 37.6% and interest cover at 7.7x as at March 31. These are industry leading numbers which allow MINT to scale up if needed during an economic boom or remain incredibly solvent during an environment of economic stress such as today. In fact, in its most recent result announcement in March, management retained $6.6 million of income available (equivalent to DPU of 0.30 cent) in view of the uncertainty from the Covid-19 pandemic. Had the tax-exempt income distribution been included, the DPU for FY19/20 would be 12.54 cents instead of 12.24.
The outlook for REITs in Asia is positive given the long-term population and urbanisation-led growth trends across the region. REITs are an attractive asset class with lower volatility, above-market dividend yields and provide exposure to high-quality property assets with steady growth. Backed by tangible real assets, income focused investors can invest alongside long-term population and demographic growth and be less worried about short term market volatility and sentiment.
