The Basics Of REITs
Real Estate Investment Trusts (REITs) refers to a company that owns and operates income-producing real estate. The key features of REITs include:
- They are traded on the Singapore Exchange like a stock.
- REITs have to distribute at least 90% of their profit to their investors.
Types Of REITs
REITs pool money from investors to buy and manage real estates. There are a few types of property that they focus on, and investors can make their investment based on their area of interest.
- Industrial REITs: Industrial REITs like Keppel DC REIT focus on industrial related properties such as warehouses, industrial parks or even data center.
- Commercial REITs: Commercial REITs such as the all so familiar CapitaLand Commercial Trust emphasize on office buildings.
- Residential REITs: Residential REITs are rather self-explanatory. They own and manages family rental apartment buildings and build houses. One such example will be the Saizen REIT.
- Hospitality REITs: Hospitality REITs focuses on properties the hospitality side of the business, owning properties such as serviced apartments and hotels. Ascott Residence Trust is one such example.
- Healthcare REITs: Given our high medical inflation, health care REITs will be an interesting one. Mainly focusing on investing in hospitals, medical centres, nursing and retirement homes, an example will be Parkway Life REIT.
- Retail REITs: Retail REITs invest in shopping malls and freestanding retail. No prize for guessing, but CapitaLand Mall Trust is a retail REIT.
On top of the above, investors can look at the two REIT Exchange Traded Funds (ETFs) such as the Phillip SGX APAC Dividend Leaders REIT ETF or the NikkoAM-Straits Trading Asia ex Japan REIT ETF.
Should REITs Be Part Of Your Portfolio?
Before you start your investment in REITs, do allow us to discuss the advantages and disadvantages of REITs investing for Singaporeans.
Advantages Of REITs
- High Dividend: At least 90% of profit is distributed back to investors. This is done on a regular basis, be it every quarterly or semi-annual. Dividends from REITs investing is all yours to keep. It will not be subjected to taxation.
- Convenient: Given that REITs are traded on the Singapore Stock Exchange, investing in it is just a few clicks away on your brokerage platform.
- 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 his own. Hence, it cost less to invest in REITs compared to investing a huge sum of money on a physical property.
- Liquidity: One can easily buy and sell their REIT shares, given that it is on the stocks exchange.
- Portfolio Diversification: Investing in REITs can help diversify one’s investment portfolio given that real estate prices may not be correlated to the stock prices in one’s portfolio. On top of that, within the REITs itself, the risk is diversified across multiple properties too.
Disadvantages 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.
- Investment Risk: There is no denying the risk involved whenever one invests. For REITs investing, it will be the factors which affect the real estate market such as property prices, debt, geographical location and interest rates.
Further Reading: Factors Affecting Price Of REITs
If you are one who loves looking at numbers, here are some number which you may wish to look at when considering your investment 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: Occupancy ratio directly affects the amount rental the owner can collect.
A majority of Singapore REITs generally has a good occupancy ratio.
- Gearing Ratio: A financial ratio that compares the equity of the owner 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 on the occupancy of the property after certain years.