What are REITs?
Singapore REITs are listed companies that you can invest in, similar to how you would buy shares in other companies. But unlike other listed companies, REITs use investors’ money to buy, operate and manage properties rather than run businesses.
There are currently 35 REITs in Singapore. They can be subdivided into these property sectors: office, retail, industrial, hospitality and healthcare.
Even if you’re a total beginner at investing, you’re probably already familiar with some REITs. For example, CapitaLand Mall Trust, a retail REIT, is one of the best known in Singapore thanks to its string of “cloned” shopping malls. Another one that might ring a bell is industrial REIT Ascendas, which manages business parks like Science Park and Changi Business Park.
When you invest in a REIT, you’re investing in the properties managed by that REIT. In a sense, you become part-owner of those shopping malls or business parks. Whatever the properties earn in rental income, some of that money is paid to you in dividends.
What kind of returns can you get from REITs?
If you invest in a REIT, you can expect it to yield between 5% and 7% a year in dividends (paid out quarterly or every 6 months).
How is it possible for yields to consistently be so high though? It’s because REITs are required by law to redistribute at least 90% of their taxable income each year i.e. pay it out in dividends.
Many investors like REITs for the (more or less) steady recurring income, similar to how bonds pay out coupons consistently.
But don’t ignore the fact that the share price of a REIT can go up and down, just like regular stocks. A REIT’s share price might fall even as it continues to pay out big fat dividends. Some investors don’t mind the trade-off, but just be aware because you never know when you might need to sell off the REIT.
How do you choose a REIT?
The key is to discover one that is very much overseen and can guarantee a steady stream of payments. Don’t simply run for those with higher revealed yields, yet set aside the opportunity to peruse the REIT’s plan and check whether it fits with your hazard hunger and to what extent you mean to remain contributed.
A decent place to begin doing appropriate research into REITs is through SGX Stock Facts. Channel “Industry” to “Land Investment Trusts (REITs)” and you can see some key details from each recorded organization. On the off chance that you need to see something besides the default details, you can alter your show and select an alternate arrangement of information focuses.
This is a decent method to see, initially, which REITs have the most noteworthy yield, which gives you a thought of how much in profits you can like to get. In any case, there’s no point purchasing a REIT that goes down on fire sooner rather than later, so you likewise need to check for signs of its dependability.
One such pointer is the obligation to-value proportion (D/E). In the event that the organization has a considerable measure of obligations to reimburse, it would be stuck in an unfortunate situation if there’s a downturn – it may need to exchange its benefits or even become penniless. To decrease your hazard, select a REIT with a solid D/E proportion underneath 60%.
Likewise, with any kind of contributing, you remain to acquire on the off chance that you put resources into the organization before each Tom, Dick, and Harry goes ga-ga over it.
Search for underestimated REITs by checking the cost to-book-esteem proportion (P/BV), which demonstrates the end cost of a stock isolated by its quarterly book esteem. AP/BV proportion of under 1 could show the potential for development, in spite of the fact that you’d have to do the exploration to affirm this is without a doubt the case.
At long last, in light of the idea of the different property advertises, a few REITs may be stronger to changes in the economy and some may be less so. The current mechanical property advertises, for instance, may see a drop in rental costs keeping in mind the end goal to hold the greatest number of occupants as they can in a slower economy. This will likely prompt a drop in wage, and profits may not be paid out if the REIT reports a working misfortune.
What Types of REITs to Avoid?
Having said that, not all REITs make good investments. Here are some types of REITs that investors should be wary of.
REITs in Singapore have a gearing ratio limit of 45%, as mandated by the Monetary Authority of Singapore. The gearing ratio is calculated by taking a REIT’s total borrowings and dividing it by its total assets.
Generally, I prefer REITs to have a leverage ratio of below 35%. This ensures that if the economy were to take a sudden downturn, there would still be a margin of safety before the 45% limit is breached.
If the 45% cap is hit, the REIT will have to raise funds through other means such as through a rights issue or private placement to pare down debt and bring its gearing ratio down to a more palatable level. During the 2008-2009 Global Financial Crisis, some REITs had to undertake rights issues at considerable discounts to their-then unit prices to keep their debt levels manageable.
Excessive private placements
Private placements happen when a REIT sells its units to a specific group of investors. Unlike a rights issue where retail investors such as you and me can participate, private placements are reserved for a select group of investors such as institutional investors or wealthy individuals.
An example of a REIT that recently conducted a private placement exercise is CapitaLand Commercial Trust (SGX: C61U). The commercial REIT raised gross proceeds of S$217.9 million from a private placement to partially fund a new acquisition in Germany. The placement, which comprised of 130 million new units, were offered at a price of S$1.676 apiece. The issue price was at a discount of around 3% to the volume-weighted average price for the REIT for trades done on 16 May 2018.
It can be seen that existing unitholders were diluted as a result of the private placement as they could not take part in it. Any REIT that has conducted excessive private placements should be avoided as retail unitholders will have their stakes in the REIT diluted in the future if more placements are organized.
Declining distribution per unit
Investors in REITs should look out for consistent growth in the distribution per unit (DPU). An increasing DPU in every year signals to the market that the REIT’s assets are stable and can attract quality tenants. On the other hand, a falling DPU shows that a REIT is struggling to increase rents and its prospects are likely not that great.
For example, healthcare REIT, First Real Estate Investment Trust (SGX: AW9U), has seen its annual DPU climb from 8.30 Singapore cents in 2015 to 8.57 Singapore cents in 2017. In contrast, AIMS AMP Capital Industrial REIT (SGX: O5RU), an industrial REIT, has been facing headwinds in its industry and this shows up in its falling DPU over the years; in its fiscal year ended 31 March 2016 (FY2016), the REIT paid a DPU of 11.35 Singapore cents, but this had declined to 10.30 Singapore cents in FY2018.
At their current unit prices, First REIT has a distribution yield of 6.7% while AIMS AMP Capital Industrial REIT sports a yield of 7.3%. Based on their yields alone, AIMS AMP Capital Industrial REIT looks more attractive. But when we look at the REITs’ DPU track record, First REIT looks better.
Therefore, when investing in REITs, we should not rely on a REIT’s distribution yield alone. We should also look at its DPU track record to make a more informed decision.
I generally avoid REITs that have a price-to-book (PB) ratio of above 1 and a distribution yield of below 6%.
The PB ratio is calculated by taking the market price of a REIT and dividing it by the REIT’s latest net asset value (also known as book value) per unit. Any ratio above 1 shows that the REIT is trading at a premium to its net asset value, which is assets minus liabilities.
In some cases, a high premium is warranted as the REIT is perceived to be a stable one. Back to the examples of First REIT and AIMS AMP Capital Industrial REIT, the former is selling at a 30% premium to its book value while the latter is selling at just 3% above its book value. The market perceives First REIT to be better than AIMS AMP Capital Industrial REIT, thus pricing it at a higher valuation.
I also prefer REITs to have a distribution yield of over 6% in order for them to be commensurate with the risk taken on to hold them. REITs are generally riskier instruments due to the high borrowings that they have to take on, and as mentioned earlier, if credit freezes up during an economic downturn, REITs could suffer.
30+ Top Singapore REITs in 2018
|S.No.||REIT||Share Price||Distribution Yield||Price to Book||DPU|
|1||AIMSAMP Cap Reit||1.42||7.25%||1.04||0.103|
|5||BHG Retail Reit||0.725||7.54%||0.87||0.0547|
|6||Cache Log Trust||0.76||8.44%||1.06||0.06418|
|7||Cambridge Ind Tr||0.525||7.34%||0.89||0.03853|
|10||CapitaR China Tr||1.52||6.64%||0.95||0.101|
|12||EC World Reit||0.71||8.49%||0.78||0.06025|
|13||Far East HTrust||0.68||5.74%||0.78||0.039|
|15||Fortune Reit HKD||9.45||5.37%||0.67||0.5078|
|16||Frasers Cpt Tr||2.27||5.24%||1.12||0.119|
|17||Frasers Com Tr||1.46||5.94%||0.96||0.0867|
|19||Frasers L&I Tr||1.05||6.68%||1.12||0.0701|
|21||Keppel DC Reit||1.4||5.09%||1.44||0.0712|
|24||Mapletree Com Tr||1.62||5.58%||1.09||0.0904|
|25||Mapletree Ind Tr||2.02||5.82%||1.37||0.1175|
|26||Mapletree GCC Tr||1.15||6.51%||0.84||0.07481|
|27||Mapletree Log Tr||1.28||5.61%||1.16||0.0718|
|28||Lippo Malls Tr||0.32||10.75%||1||0.0344|
|29||OUE Com Reit||0.68||6.87%||0.75||0.0467|
|37||Viva Ind Tr||0.895||8.35%||1.17||0.07472|