REITs – Vehicle for owning a property in Singapore?

Did you know that Singapore is a top choice for residential property among the Ultra High Net Worth individuals?  Not only that, Singaporeans (especially our parents’ generation) love buying up properties due to a combination of Singapore’s land scarcity,   stable socio-political climate and potentially attractive returns.

In response, the government has stamped out flippers (i.e. people who buy and quickly resell properties for profit) and tried to cool down the residential property market through a series of seller stamp duties (pun intended) and tightening foreign labour growth to damp property demand.

Now, as millennials, we might also be attracted to the perks of owning a property in Singapore, such as the ability to receive rental income. Others are attracted to the idea of them gradually appreciating in value over the long term.

If you’re thinking of owning properties in Singapore, there is a way!

REITs

Introducing REITs. REIT is the acronym for Real Estate Investment Trust, or a fund that pools investors money to invest and operate properties. The properties are rented out to tenants (e.g. your chicken rice uncle or your healthcare provider) in return for rent.

The rents are then distributed to unit-holders of the REIT as dividends, and Singapore REITs are mandated by law to pay 90% of their income as dividends.

Types of REITs

REITs, as properties, can come in a variety of forms, from logistics warehouses to hospitals and retail malls. When investing in a REIT, you can choose from different industry sectors such as logistics, hospitality, retail, office, commercial, industrial and healthcare, among others. As different industries have different demand/supply profiles and are affected by economic conditions to a different degree, investing in REITs in some industries might be riskier than others.

REITDATA is a website that I frequently use to compare the various Singapore REITs.

How do I buy REITs?

REITs are traded like stocks on an exchange. After an IPO of a REIT, it is traded freely and investors can buy or sell shares of the REIT. You’d need a brokerage account and a Central Depository account to buy REITs in Singapore.

There are two ways to own REITs; either by buying the individual REIT itself (similar to buying a stock – some examples of individual REITs are Mapletree Industrial Trust or CapitaLand Mall Trust) or by buying an Exchange Traded Fund (ETF) that tracks a basket of REITs (e.g. the Lion-Phillip S-REIT ETF), allowing you to own a diversified portfolio of REITs in Singapore across different industry sectors.

A table showing the available Singapore REITs can be found on REITDATA.

Why do I want to buy REITs?

As an investor who might want to diversify your investments, REITs offer an alternative way to invest in a income producing asset class with stable to long-term growth. REITs offer a higher interest rate than traditional income asset classes like bonds, and the opportunity for capital appreciation over time.

REITs are mandated to distribute dividends – hence investors like you can obtain a regular income stream if you hold them in your portfolio.

How do I choose which REITs to buy?

If you’re a novice investor, buying an ETF that tracks the local REITs market might be an appealing way to invest in REITs as you do not have to do stock-picking or any analysis. By simply buying the market, you’d enjoy significant exposure to the income producing properties of owning REITs, without the heavy downside of idiosyncratic risks.

Buying the ETF allows you to obtain a low-cost access to a well-diversified portfolio of  sustainable income-producing assets.

In the future, I will have posts on REIT selection and share how economic indicators such as inflation rates and GDP growth might affect the share prices of REITs and their outlook.

Why would I want to diversify my REIT portfolio?

Not all industry sectors behave the same way. For example, retail properties like your shopping malls tend to be more resilient in economic downturns, but might be affected by the shift towards e-commerce. Hospitality properties like your hotels tend to do well in cycles, booming when the economy is good or during seasons when tourist arrivals soar. Healthcare properties like hospitals are seen to be well poised to meet a growing demand for healthcare needs as our population ages.

What is the correlation of REITs to other asset classes like stocks and bonds?

According to Lion Global, Singapore REITs have a small positive correlation with Singapore equities (R=0.68) and Singapore bonds (R=0.62) between 2012 and 2017.

What is your personal investment story in REITs?

I started investing in REITs since I was in national service. Back then, I used my small monthly allowance as a corporal to invest in several REITs based on dividend yield – which was a terrible choice.

I had owned this particular REIT called Sabana REIT, which at that time was trading at $1.20 per share with a yield of 11% annually. I invested about $10,000 of my savings in this because my mum told me that the yield was very attractive.

Fast forward a year later, the Singapore REIT market was plagued with sharp losses across, and Sabana came crashing to $1 – a 16% loss. In that year, Sabana’s results didn’t meet shareholders’ expectations, and crashed further to sub-$0.80. I exited my position at $0.84 amidst increasing challenges, poor management and overpaying for acquisitions.

Sabana REIT now trades at $0.43 after a management change – representing almost a 60% capital loss if I had not sold it.

Moral of the story? Do your own due diligence/research and don’t just look at yields as a purchase consideration.

What’s your parting advice?

I like investing in Singapore REITs because of their tax transparency, stable income generation and how property prices (and rents) tend to bid upwards in the long term.

But investing in REITs is not risk free. It is subjected to capital losses (like my Sabana example above) when interest rates go up, or when the REIT is unable to sustain its payouts. Individual REITs’ performance can be affected by its own mismanagement, industry weakness or global macroeconomic events, property cycles and even unpredictable government policies.

Derrick is a digital native, finance geek and avid photographer. He loves spontaneity but is a control freak at the same time.

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