REITs Investment Singapore (2023) Guide for Beginner Investors

Why REITs?

For investors looking for a regular stream of dividend income, investing in Real Estate Investment Trusts (REITs) is a popular choice.

REITs are a low-cost way for investors to enjoy some of the perks of being a landlord without needing high start-up capital and going into debt from your mortgage.

Intrigued?

Here’s what you need to know about REITs!

TL;DR: A Beginner’s Guide to Investing in Singapore REITs

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any investment. 

What Are Real Estate Investment Trusts (REITs)?

For those of you wondering what a REIT is.

They are basically listed companies that own and operate income-producing real estate, be it residential or commercial. By investing in a REIT, you become a co-owner of the REIT and are entitled to earn a cut of the rental income from the property assets. In REIT speak, this rental income is called distribution yield.

It’s basically a trust which pools money from investors to invest in a portfolio of income-generating real estate assets.

Think of it as you and a group of friends coming together to buy a couple of properties, hiring a professional manager to rent them out, and collecting the rental income.

The cool thing about Singapore-listed REITs or S-REITS is that they are regulated by the Singapore Exchange (SGX) if they wish to be listed:

More importantly, S-REITs are required to pay out at least 90% of their yearly taxable income to investors.

Yep.

This means that as a REIT investor, you will receive regular dividend payouts or distributions, which are net of fees for REIT management, property management, and trusteeship.

Similar to stocks, the price of REITs can rise and fall based on many factors. But this also means that there’s a chance for investors to achieve capital gains if they sell the REITs when the value of the REITs property portfolio increases.

This makes it an investment to consider for investors looking for a regular source of income.

REIT Types Explained

REITs pool money from investors to buy and manage real estate. Here are the major type of REITs you should know

Diversified REITs: Diversified REITs receive income from tenants while owning and managing a variety of property types. For instance, diversified REITs may have portfolios that include both office and retail real estate.

Healthcare REITs: Given our high medical inflation, healthcare REITs will be an interesting one. Mainly focusing on investing in hospitals, medical centres, nursing and retirement homes.

Hospitality REITs: Hospitality REITs focus on properties on the hospitality side of the business, owning properties such as serviced apartments and hotels.

Industrial REITs: Industrial REITs focus on industrial-related properties such as warehouses, industrial parks or even data centres.

Office REITs: These REITs invest in office buildings. They generate revenue by renting out office space with long-term leases.

Residential REITs: Residential REITs are rather self-explanatory. They own and manage family rental apartment buildings and build houses.

Retail REITs: Retail REITs invest in shopping malls and freestanding retail.

Diversified REITs

Healthcare REITs

Hospitality REITs

Industrial REITs

Office REITs

Retail REITs

Pros and Cons of REITs

Before you start your investment in REITs, let us discuss the advantages and disadvantages of REIT investing for Singaporeans.

Pros Of REITs

• Regular Dividend Income Stream: At least 90% of the REITs’ taxable are distributed back to investors. This is generally done on a regular basis, be it quarterly or semi-annually. Dividends from REITs investing are all yours to keep.
• Tax Free: Returns from REITs in Singapore are not taxed.
• Low Barriers Of Entry: REITs offer investors who believe in the value of the property market to be part of the growth without having to purchase a physical property on their own. Hence, it costs less to invest in REITs compared to investing a huge sum of money on physical property.
• Higher Liquidity: One can easily buy and sell their REIT shares, offering higher liquidity than owning physical real estate assets.
• Portfolio Diversification: Investing in REITs can help diversify one’s investment portfolio spanning a variety of property types, including those in the commercial, industrial, residential, and hospitality sectors. And given that real estate prices may not be correlated to the stock prices in one’s portfolio.
• Professional Management: To minimise the amount of hands-on involvement needed from investors, REITs are managed by qualified experts who handle operational matters, tenant relations, and property management.
• Capital Appreciation: Over time, the value of REITs may increase, giving rise to possible capital gains when they are sold for more than they were purchased for.

Risk Of REITs:

• Slow Growth: Given that REITs have to distribute 90% of their profits as dividends, they are left with only 10% or less of their profit to grow. This hinders their growth, as compared to the other companies in the market.
• Market Volatility: Like other financial instruments, REIT prices are subject to market fluctations, which could result in capital losses on investments.
  Interest Rate Sensitivity: REITs are susceptible to changes in interest rates because higher rates may result in greater borrowing costs for purchasing real estate and may also have an effect on distribution yield.
• Dependence on Real Estate Markets: The success of REITs is directly correlated with the success of the underlying real estate markets. Returns may be affected by economic downturns or oversupply in particular real estate markets.
• Management Competence: The management teams of REITs must be capable of success. Both profits and property values can be impacted by poor judgement or poor management.
• Dividend Unpredictability: Although many REITs offer consistent dividends, economic difficulties can have an influence on rental income, which could result in distribution unpredictability.
• Fees: REITs often have associated fees, such as management fees, which can reduce overall returns.

Read More: Age vs Risk Profile: What Investments Should You Hold At Your Age

Factors Affecting the Price Of REITs

In addition, here are some terms you need to know when researching to invest in any REITs:

• Distribution per Unit (DPU): The DPU can easily be found under the SGX portal under Corporate Action.

DPU = Dividends X Number of shares X Frequency of payout per year)

• Occupancy Ratio: The occupancy ratio directly affects the amount of rental the owner can collect.

A majority of Singapore REITs generally have a good occupancy ratio.

• Gearing Ratio: A financial ratio that compares the owner’s equity to borrowed funds.

Gearing ratio = Company Debt ÷ Shareholder equity

• Weighted Average Lease Expiry: A metric used to measure the possibility of a property going vacant.

It calculates the % of tenants and their lease term in years to come. This gives a good gauge of the property’s occupancy after certain years.

How to Choose REITs and How to Buy REITs

If you are keen to learn how to research and buy individual REITs, a good first step would be to check out our comprehensive 10 step guide to choosing the best Singapore REITs:

But if you are looking for something more beginner friendly that provides instant diversification to research further, you might want to check out our guide to REIT Exchange Traded Funds (ETFs):

Read More

• REIT ETFs: The Ultimate Singaporean Guide to Investing in ‘Em
• DBS Dividends – Your Complete Guide to DBS Group Holdings Ltd’s (SGX: D05)
• $10,000 Dividend Income Per Month: Here’s How Much You Need To Invest!