It is no surprise that Real Estate Investment Trusts (REITs) have been a perennial favourite amongst Singapore investors. Amidst a low-interest rate environment, REITs definitely has its place in an investment portfolio, providing stable returns and dividend income.
For those who hasn’t gotten a chance to invest in this lucrative sector, it’s never too late to start. In fact, the first REIT, CapitaLand Mall Trust, has only been listed in 2002, which means the sector is only less than 15 years old. So what does a new investor in REITs need to know before jumping right in?
Types and outlook for REITs
Essentially, a REIT stands somewhat between a stock and a bond. REITs own a portfolio of properties and receive income from rentals, then pay out regular dividends to investors. They are listed on a stock exchange and trades in the same way.
(For a more in-depth look at how REITs stack up against actual properties, read our previous article).
Singapore’s REIT industry, commonly known as S-REIT, comprises of REITs with portfolios in retail, office and industrial, medical and hospitality properties. Choosing which REIT to invest in depends very much on your outlook for the sector, as well as the ongoing economic environment. Typically, the REIT sector in Singapore has an average dividend yield of 6.7 percent.
- Retail – With more and more consumers turning towards buying online and even on their mobile, retail REITs are likely to suffer going forward. Rental income is also likely to fall as more and more retailers exit the market.
- Office – traditional office space occupiers are namely financial institutions, which have been cutting headcount and downsizing. With the economy predicted to be bearish in 2017 and with rising supply of office space, the sector outlook is forecasted to be lacklustre.
- Residential – a lower migration rate to Singapore and increasing redundancies in the labour market will likely see lower rental rates, with an increasing volume of supply.
- Industrial – with higher labour cost, a sluggish economy and declining manufacturing sector, the industrial sector is seeing falling rents and lower leasing volumes in warehouses and business parks
- Healthcare – Healthcare REITs are trusts engaged in the acquisition, development, ownership, leasing and management of properties serving the healthcare industry. These include hospitals, nursing homes, and assisted living properties. With a rapidly ageing society and the sector being rather recession-proof, they are considered a more resilient investment option.
- Hospitality – Perhaps one of the brighter sparks in the REITs sector. With higher tourist arrivals in 2016, this could help stabilise the earnings for hospitality REITs.
Popular S-REITs New Investors Can Consider
For new investors in the S-REIT market, picking a REIT to invest in can be a difficult endeavour. Other than simply choosing a sector, one needs to consider many other factors, pretty much like how one would pick a stock.
These factors can include the price-to-book ratio, quality of assets the Reit owns, the track record of the Reit management team, potential yield and historical returns, as well as the gearing ratio. You can of course, choose to devote time and effort to learn and apply fundamental analysis of these companies, or perhaps take the easier approach of following the herd to buy what’s popular in the market.
- Keppel DC REIT
A relatively new REIT, Keppel DC REIT was listed on 12 December 2014 and it is the first Reit listed on the Singapore Exchange that provides a pure play on data centres.
Keppel DC REIT’s investment strategy is to invest in a diversified portfolio of income-producing real estate assets which are used primarily for data centre purposes. As of October 2016, the REIT has a portfolio valued at approximately $1.13 billion comprising 10 high-quality data centres strategically located in key data centre hubs, spanning eight cities in six countries in Asia Pacific and Europe.
It’s IPO price was at $0.97 and it currently trades at $1.22, growing about 25 percent in 2 years.
- Mapletree Commercial Trust
Mapletree Commercial Trust (“MCT”) is considered a diversified Reit as it invests in a portfolio of income-producing real estate used for both office and/or retail purposes.
MCT was listed on the Singapore Exchange on 27 April 2011 and is sponsored by Mapletree Investments Pte Ltd. Its portfolio comprises five properties located in Singapore, namely:
- VivoCity, Singapore’s largest shopping mall
- PSA Building, an integrated development with a 40-storey office block and a three-storey retail centre known as Alexandra Retail Centre
- Mapletree Anson, a 19-storey premium office building located close to the Tanjong Pagar MRT Station
- Bank of America Merrill Lynch HarbourFront, a premium office building located at HarbourFront
- Mapletree Business City I, one of the largest integrated office and business park complexes in Singapore with Grade-A building specifications, located in the Alexandra Precinct
The trust has been dishing out stable dividend returns of above 6 percent and its stock price has grown more than 60 percent since IPO.
- First REIT
First REIT is Singapore’s first healthcare real estate investment trust listed on the Singapore Exchange. Its investment strategy encompasses a diverse portfolio of healthcare and healthcare-related real-estate assets, mostly concentrated in Indonesia.
When it comes to healthcare REITs, there are only three listed on SGX – Parkway Life, First REIT and RHT Health Trust. Many Singaporeans may prefer Parkway due to familiarity and the fact that most of their holdings are concentrated here.
But looking at historical returns, there may be more advantage to investing in First Reit. It comes with a higher distribution yield of 6.5 percent compared to Parkway Life’s 4.9 percent, a lower price-to-book ratio, as well as a higher total 3-year returns of 46.1 percent compared to the latter’s 22.8 percent.
Before you make any investment in REITs, always remember to carry out due diligence and take into consideration the sector outlook and economic conditions before taking the plunge!