It was revealed recently that Far East Association, a leading Singapore real-estate developer, was preparing to raise more than S$500 million through a Real Estate Investment Trust (REIT) by listing some of its hotel and serviced flat assets next year.
Indeed Singapore's REIT market has been growing with several new lists in spite of the volatile market as financiers are interested in the prospect of the stable yields that these securities can provide. In this post we'll examine what REITs are, the sort of yields you can get from them and their performance, and what to keep an eye open for when making an investment in them.
What are REITs?
A REIT is a tax-advantaged corporate automobile that's utilized to provide a real estate investment structure that will accommodate a wide variety of stockholders, like what retirement funds do with stocks. In this way even a retail investor can get exposure to real-estate with just a small outlay. REITs are often needed to pay out more than 90% of their taxable backers as a distribution to speculators.
There are presently around 27 REITs and Business Trusts with real estate exposure listed in Singapore, with a market cap of about S$40 bill. Singapore REITs (S-REITs) are a relatively contemporary phenomenon with the 1st one (CapitaMall Trust) listed in July 2002.
What kind of yields can you get from Singapore REITs (S-REITs)?
On average the S-REITs are trading at roughly 6% yield, but they go from 4+% to 9+%. At the bottom end of the yield range are the "blue chip" names like CapitaCommercial Trust and CapitaMalls Trust, which tend to be enormous, liquid and have possession of an enormous portfolio of quality assets. For instance, CapitaMall Trust's assets include Square Singapura, IMM, Bugis Junction and Tampines Mall. At the higher end of the range are the smaller and trickier names like AIMS and Cambridge Industrial Trust.
Generally office and retail REITs tend to trade at lower yields than industrial and logistics REITs as their rental revenue stream is steadier and less unpredictable, particularly during economic downturns.
From a capital gains viewpoint, so far this year the S-REITs as a whole have been comparatively flat, with the retail names such as Starhill Worldwide and Frasers Centrepoint slightly outperforming, and the office names like Capitacommercial Trust and KREIT Asia a little underperforming.
What must you take note of when making an investment in REITs?
Before starting making an investment in REITs, there are several issues you need to take note of:
1. Composition of REIT assets
REITs are sometimes classified according to the type of assets they are comprised of: retail (i.e. Malls), office, industrial, diversified or specific like hotel or healthcare REITs. Each kind of asset has its own traits and have different drivers which will determine how they perform. As an example, how well a hotel REIT performs is dependent on the quantity of traveler arrivals.
2. Geographic diversification and currency risk
REITs are not just made up of different types of assets, but these assets could also be found in different countries, e.g. Singapore, HK, Indonesia, China, and Japan. If the REIT does not hedge this currency exposure, then the investor may be exposed to currency risk, so a powerful Singapore greenback could lead to interpretation losses when the overseas incomes are converted back to pay the dividend.
3. Expansion of Dividend Per Unit (DPU)
A good REIT won't just have a high and stable yield but one that is also growing over a period of time. The key source of a REIT's revenue is rental, and so you've got to also contemplate how that rental will grow over time. This will depend on factors including GDP growth, and also what type of rental increases are built into the lease contracts.
4. Spread over 10 year Executive Bond yield
If REITs are trading at yields that are too close to the Government Bond yield (which is risk free), then the investor may not be being compensated adequately for that risk. The larger the yield spread that REITs are trading over Govt Bonds, the more probably tasty they are.
5. Gearing
REITs are allowed to borrow up to 35% of their total assets without a credit status from a major rating agency. If REITs are heavily geared (leveraged) this creates a risk that they may run into serious problems if financing becomes a problem as we saw in the Great Financial Emergency. Also any potential acquisitions that they have do to be. Done throughout raising equity (e.g. thru a rights issue) rather than just borrowing more to pay for it.
REITs are a good way to get exposure to a diversified portfolio of commercial properties and to enjoy an engaging dividend yield, but don't come without investment risks. Please do your homework before investing!
Hope that you enjoyed reading this Singapore property market article!
Indeed Singapore's REIT market has been growing with several new lists in spite of the volatile market as financiers are interested in the prospect of the stable yields that these securities can provide. In this post we'll examine what REITs are, the sort of yields you can get from them and their performance, and what to keep an eye open for when making an investment in them.
What are REITs?
A REIT is a tax-advantaged corporate automobile that's utilized to provide a real estate investment structure that will accommodate a wide variety of stockholders, like what retirement funds do with stocks. In this way even a retail investor can get exposure to real-estate with just a small outlay. REITs are often needed to pay out more than 90% of their taxable backers as a distribution to speculators.
There are presently around 27 REITs and Business Trusts with real estate exposure listed in Singapore, with a market cap of about S$40 bill. Singapore REITs (S-REITs) are a relatively contemporary phenomenon with the 1st one (CapitaMall Trust) listed in July 2002.
What kind of yields can you get from Singapore REITs (S-REITs)?
On average the S-REITs are trading at roughly 6% yield, but they go from 4+% to 9+%. At the bottom end of the yield range are the "blue chip" names like CapitaCommercial Trust and CapitaMalls Trust, which tend to be enormous, liquid and have possession of an enormous portfolio of quality assets. For instance, CapitaMall Trust's assets include Square Singapura, IMM, Bugis Junction and Tampines Mall. At the higher end of the range are the smaller and trickier names like AIMS and Cambridge Industrial Trust.
Generally office and retail REITs tend to trade at lower yields than industrial and logistics REITs as their rental revenue stream is steadier and less unpredictable, particularly during economic downturns.
From a capital gains viewpoint, so far this year the S-REITs as a whole have been comparatively flat, with the retail names such as Starhill Worldwide and Frasers Centrepoint slightly outperforming, and the office names like Capitacommercial Trust and KREIT Asia a little underperforming.
What must you take note of when making an investment in REITs?
Before starting making an investment in REITs, there are several issues you need to take note of:
1. Composition of REIT assets
REITs are sometimes classified according to the type of assets they are comprised of: retail (i.e. Malls), office, industrial, diversified or specific like hotel or healthcare REITs. Each kind of asset has its own traits and have different drivers which will determine how they perform. As an example, how well a hotel REIT performs is dependent on the quantity of traveler arrivals.
2. Geographic diversification and currency risk
REITs are not just made up of different types of assets, but these assets could also be found in different countries, e.g. Singapore, HK, Indonesia, China, and Japan. If the REIT does not hedge this currency exposure, then the investor may be exposed to currency risk, so a powerful Singapore greenback could lead to interpretation losses when the overseas incomes are converted back to pay the dividend.
3. Expansion of Dividend Per Unit (DPU)
A good REIT won't just have a high and stable yield but one that is also growing over a period of time. The key source of a REIT's revenue is rental, and so you've got to also contemplate how that rental will grow over time. This will depend on factors including GDP growth, and also what type of rental increases are built into the lease contracts.
4. Spread over 10 year Executive Bond yield
If REITs are trading at yields that are too close to the Government Bond yield (which is risk free), then the investor may not be being compensated adequately for that risk. The larger the yield spread that REITs are trading over Govt Bonds, the more probably tasty they are.
5. Gearing
REITs are allowed to borrow up to 35% of their total assets without a credit status from a major rating agency. If REITs are heavily geared (leveraged) this creates a risk that they may run into serious problems if financing becomes a problem as we saw in the Great Financial Emergency. Also any potential acquisitions that they have do to be. Done throughout raising equity (e.g. thru a rights issue) rather than just borrowing more to pay for it.
REITs are a good way to get exposure to a diversified portfolio of commercial properties and to enjoy an engaging dividend yield, but don't come without investment risks. Please do your homework before investing!
Hope that you enjoyed reading this Singapore property market article!
About the Author:
Propwise.sg, a top Singapore property blog, is devoted to helping you understand the real estate market and make better choices. Visit us to read more Singapore property market articles.
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