You might wonder why should you invest in Real Estate Investment Trusts, and what exactly can you gain by doing so? Historically, Real Estate Investment Trusts have offered the investors many benefits like long-term competitive performance, substantial stable dividend yields, liquidity, transparency, as well as portfolio diversification. These are all the perks that an investor can enjoy if they invest in it.
Primarily, Real Estate Investment Trusts (REITs) would deliver high dividends and a long-term capital appreciation that will inadvertently place them as an essential investment for many sides.
As such, many retirement savers or perhaps retirees who are finding means to support themselves financially tend to spend their money into investing in REITs as they consider this as a fundamental and essential type of investment.
But the question that comes next is it worth it? What are the pros and cons? What should you know before getting involved in this type of investment? Well, here we have made a guide for you to know all about investing in Singapore REITs.
What are REITs?
The most important question that you want to ask is, what exactly are REITs? Singapore Real Estate Investment Trust or also commonly known as S-REITs, are listed companies where you can invest your money. Much similar to how one would buy shares in any SGX-listed companies, as well as to own and operate real estate properties. As such, you can say that REITs are a part of these SGX-listed companies.
When you invest in REITs, you get to own and operate real estate properties whereby these properties would then be leased out to tenants for rental income. As these investors are now the co-owners, they can get access to the rental income for the properties that they have invested, which is the distribution yield. The distribution yield is the earnings that you get back from investing. As the value of the property assets that they have increased, they are also entitled to gain capital benefit from the increase.
So, why should you invest in REITs? If you want to generate a dividend stream that is stable as well as to enjoy the benefits of a gradual increase of appreciation in property value, then REITs would be the best decision for you.
Moreover, REITs are mostly a crucial key factor when you want to construct any equity or fixed-income portfolio. Investing in REITs will grant you a potential high total return as well as lowered risks. This would make it an excellent counterbalance to stocks, bonds, and cash as you can generate dividend income and also a good capital appreciation.
So, what are some of the REITs that you have heard of? Well, regardless if you’re a newbie in investments, you would be no stranger to some of these famous landmarks owned or managed by REITs.
- Science Park and Changi Business Park are examples of business parks that are managed by Ascendas Reit. This is Singapore’s first and also the most prominent business space and industrial real estate investment trust.
- It is also noteworthy to mention that the famous Marina Bay Financial Centre is owned by REIT. Suntec Reit owns this landmark with a total of 33% ownership, and currently also has property on seven other landmark buildings with a value of almost $10 billion.
Next, what is the difference between REIT and other traditional shares?
When you want to start an investment, you might be wondering if buying Singapore REITs or buying physical properties would be the better form of investment. Surely, both come with their own pros and cons.
If you are considering buying REITs, you can do so with low capital. You don’t need to worry about forking out a large sum of money as investing in it is not as costly as buying a physical property. Bear in mind that you need thousands of dollars in order to buy physical property to get a share.
It is much easier for an investor to buy and sell REITs as they use trading much like stocks on the stock exchange. It would be a bit hard to buy a physical property due to the high price as well as the long period of the transaction process. Finding a buyer itself for a physical property is not as easy as REITs for this reason.
REITs trade based on the stock exchange and this makes the price dependent on the market volatility. As such, they are bound to face price fluctuations because of the state of the market. On the other hand, you need not need to worry about price fluctuations when buying physical properties as they are not being traded based on the volatility of the market.
The most crucial part of buying physical properties traditionally is managing it. The buyer is responsible for managing the physical properties whereby they have to take care of the maintenance of the properties as well as making arrangements with the tenants all by themselves. Unlike physical properties, REIT investors don’t need to worry about managing their properties as they can hire managers to take care of the maintenance process.
Different types of REITs
As Real Estate Investment Trusts (REITs) are generally owned and managed by different real estates, there are many different types of REITs. Here’s a list of the different types of REITs:
Whether you realize it or not, most shopping malls are actually owned by retail REITs. As much as 24% of the investments of REITs are in shopping malls and other forms of retails. So, it is important for an investor to first access the retail industry if they are planning to invest in retail REITs. When you invest in retail REITs, the money will come from charging rents from the tenants in said shopping malls.
You need to be sure that retailers have good cash flow with good sales so that there would not be any delayed or default monthly payments. So what you can do is by making sure the retail REITs that you are investing in have a very high chance to generate good profits and strong balance sheets. Take the most out of this opportunity to invest in really good retail REITs.
Residential REITs, on the other hand, own and manage rental apartment buildings and manufactured housings. Like any other investment, you should always analyze the factors prior to buying residential REITs. One of the few things to consider is the affordability of the homes in the area you’re planning to invest in. An increase in rental prices is usually found in the target areas where the rent is high because of low home affordability. So most residential REITs are focused on large urban centres.
In Singapore, residential areas like Orchard and Tanjong Pagar tend to have high rent prices so you can consider investing in these areas in order to gain higher rental income. Not only that, but you could also look at the population as well as job growth. Areas where the economy is growing steadily with a steady net inflow of people, tend to be a good sign. Consider investing in residential REITs in areas with these factors.
There are also REITs that invest in office buildings. As such, they are called Office REITs. Primarily, this type of REIT would get their income from the office rents, which are usually signed with long-term leases. Of course, there are several things to consider before investing in office REITs. Assess the current state of the economy, look at the unemployment rate and the vacancy rates.
Is the area of office REIT that you are planning to invest in doing good economically? Will they have enough capital? These are some of the questions that you need to ask yourself and do some research before going ahead and buying office REITs.
Those that own and manage industrial facilities are industrial REITs. They get their income from the tenants who rent the spaces. The spaces include distribution centres, warehouses or even specialized facilities. For example, Ascendas REIT puts focus on investments in business park areas like Changi Business Park. Unlike office REITs, most of these industrial properties usually have shorter leases of an average of 30 years.
Essentially, the investment focus of healthcare REITs is on real estate of medical facilities like hospitals, nursing and retirement facilities, and medical centres. A good healthcare system would most likely guarantee the success of these real estate properties. Generally, these facilities are dependent on the occupancy fees that are available.
If the demand for healthcare services is high, the likelihood for the healthcare real estate to be in a good state increases, you might want to consider companies where healthcare experience is top-notch with a strong balance sheet.
How do REITs raise funds?
REITs generally would raise funds by acquiring new properties. As mentioned previously, they allow you to own and operate real estate properties whereby you get to generate an income from tenants who are paying rents. However, a stable retained income may be insufficient because of the large dividend distributions.
There are ways that REITs can take to overcome this problem, such as by carrying out fundraisings.
- You can put your properties on collateral as a debt for the bank to grant you a lower interest rate. But do note that S-REITs will only allow 45% debt-to-asset ratio at a maximum which will limit their ability to borrow money from the bank.
- REITs can also issue perpetual securities as one of the means to raise funds. Perpetual securities have a fixed interest rate which it’s equity are much similar to a bond. Therefore, issuing perpetual securities is not considered as debt, and you can borrow more money due to the lowered gearing ratio.
- When there is an insufficient debt room for REITs to borrow, they can also consider going for the rights issue. Basically, a rights issue grants you the right to buy more shares or units in a REIT. This right is often granted by the unitholders of REITs at a price much lower than the market price.
What should you consider before buying them
We have already listed out the different types of REITs and how they work. But before that, there are still a few things you have to consider before buying them. So the next question is, what should you consider before buying?
There are many different approaches to select REITs, but essentially you need to analyze the market for you to obtain great returns.
Analyze the Singapore REIT performance
You can do this by looking at the universe of REITs where you can assess the performances of all REITs in Singapore across different time frames. When you look at different time frames of REIT investments, you will have an idea of REIT with a good portfolio. As a result, you will get to choose the best for you, according to the current state of the economy.
Check out the quality of the properties in REITs
It’s crucial to analyze the portfolio with excellent qualities. Consider taking these factors into consideration when looking at the portfolio:
- Be sure to know the average term of the leases. This can help to give you a secure view of the current income stream.
- When looking at the REIT’ properties, take note of the quality of those properties such as the location and the sector of the properties.
- Consider the competition that the properties may have to lessen risks and threats.
- Assess the current state of the economy
It goes without saying that the economy’s state may undergo ups and downs. When you are in the pursuit of buying REITs, it is of paramount importance for you to assess the current state of the economy as it has a direct impact on REITs. When economic growth is strong, you can be relieved that it would be a good indicator to buy. Also, as REITs are also focused on a specific sector, looking at the state of the sector you’re interested in is also equally important.
How can you start investing in REITs
Now, the most important question. How can you start investing in REITs? There are different ways that one can invest, such as through buying shares of publicly traded REIT stocks, REIT mutual funds or also through exchange-traded funds (ETF). Just like any other public stock, an interested investor can directly purchase shares in a REIT.
Similar to stocks, you can invest in individual REITs or also invest in a lump of REITs through ETFs. ETFs are the passive funds that essentially follow the results of the underlying indices. Investors can choose to invest in these REIT ETFs, which are concluded by the SGX such as:
- NikkoAM-Straits Trading Asia Ex-Japan REIT ETF
- Lion-Phillip S-REIT ETF
- Phillip SGX APAC Dividend Leaders REIT ETF
Moreover, you can also have the assistance of a broker, investment advisor or financial planner to help you in your pursuit of investing in REITs. They are there to help you analyze your financial objectives as well as to recommend the most appropriate REIT investments for you. Do note that you have the choice to invest either in public non-listed REITs or private REITs.
If you are a beginner in investments, don’t be too intimidated to invest in REITs. Of course, there are opportunities and downsides to every action. This is why it is crucial for you to weigh all options, do proper and adequate research and be well prepared before you want to start investing in REITs. With all things being taken into consideration, we are sure that you’ll be able to make the right decision.
We hope that this article will be helpful to you if you are considering to invest in REITs. If you are also on the lookout for reliable licensed money lender institutions in Singapore, check out Bugis Credit! Head over to the website to find out more.