The basics of Reits
If you’ve only got a minute:
- Reits are a cost-effective way for retail investors to diversify their portfolio to include non-residential property holdings.
- The mandate for Singapore Reits requires 90% of profits to be paid back to investors, making them an attractive dividend investment.
- Before investing in a Reit, do gauge the quality of its property portfolio, income characteristics, and economic conditions.
More people are understanding the importance of having a holistic financial plan, which includes an all-rounded investment strategy to that play a crucial role in achieve overall financial wellness.
One of the ways to attain this involves having property investments as part of a diversified portfolio. However, for the average investor, owning more than one residential property might not be feasible. Especially, given that residential property prices in Singapore have been steadily rising since early-2020, they don’t come cheap either.
Moreover, based on “Will Property still be your pot of gold?”, a report published by DBS in October 2021, a new private property may no longer be “that pot of gold” that Singaporeans can solely rely on as their retirement nest egg.
Based on total returns of different asset classes from 1Q2009 to 1Q2021, for every S$100 invested, an investor will stand to receive returns of about S$399 for first private property and S$339 for a HDB flat. Meanwhile, purchasing a second private property would have yielded S$209 for every S$100 invested.
While these returns are respectable, Real Estate Investment Trusts (Reits), another property-related asset class, actually performed better during this period. In the case of Singapore Reits (S-Reits), for every S$100 invested, an investor would have received returns of about S$486.
It is important to note that real estate investment covers a broad spectrum and should not be viewed only through the lens of your home or rental property. Thankfully, most of us are able to gain ownership of a wide range of properties both locally and globally through Reits.
A brief history of Reits
When Reits first listed in the US in the 1960s, they provided an avenue for retail investors hold investments in real estate portfolios, which until then, were only available to institutions and the wealthy.
Reits first made their way to Singapore through the listing of CapitaMall Trust - on the Singapore Exchange (SGX) in 2002. The portfolio of properties that were part of this first Reit listing includes well-known Singapore malls like Raffles City and Plaza Singapura
Following a merger with CapitaLand Commercial Trust in November 2020, these properties are now part of the CapitaLand Integrated Commercial Trust (CICT) portfolio, the largest Reit in Singapore.
As of 31 Dec 2021, there are 44 Reits and property trusts listed in Singapore, of which 7 are part of the benchmark index, the 30-component Straits Times Index (STI).
8 things you should know about Reits
If you are new or not too familiar with Reits, we’ve compiled answers to some key questions or features of Reits for first-time investors. For those who have experience with Reits, they act as a refresher!
1. What are Reits?
They are collective investment schemes that own and invest in income-generating assets (often through rent collection) across various real estate sectors. Properties in a Reit portfolio may include office buildings, shopping malls, warehouses, hotels and more recently, data centres.
As such, Reits allow retail investors to pool capital to buy into properties that would otherwise be out of their individual reach. Reits listed in Singapore are known as S-Reits.
2. How to buy Reits?
Most Reits trade on public markets, making them highly liquid assets for investment at low costs compared to fully owning a property.
Individuals are also able to purchase them through unit trusts (UTs), Reit exchange-traded funds (ETFs) and more recently, through robo-advisors like DBS’ digiPortfolio.
3. How to qualify as a Reit?
In order for real-estate portfolios to qualify as Reits, a number of requirements specific to where they are listed need to be met.
This means Reits in Australia, the US and Singapore are governed by different laws and have different requirements on the amount of debt a Reit can hold, the minimum payout to unitholders as well as the number of mature properties it can have.
4. Cash payouts from Reits
The primary aim of Reits all over the world are identical - to generate a healthy level of income distribution and long-term unit price appreciation for its investors.
Revenue generated by Reits come primarily from rental from tenants. This may come from individuals, small businesses or large corporations who rent premises to conduct their operations.
Income generated from a Reit’s assets are distributed to unitholders at regular intervals and it is not uncommon distributions to occur quarterly, which is why they’re viewed as an attractive “income investing” options.
These distributions are disbursed to investors after fees for Reit management, property management and trusteeship are deducted.
5. Sponsors of Reits
Each Reit also has a sponsor - a parent or a majority unitholder of the trust. In the case of CICT, CapitaLand Investment Limited is its sponsor. Often times, sponsors used to wholly own properties that form a Reit.
By structuring a portfolio of properties into a Reit, sponsors have a platform to sell properties to the trust often at fair or lower-than-market average prices. This, in turn, frees up capital for further investments.
Moreover, the sponsor can provide a pipeline of assets for future acquisition by the Reit. This is why the attractiveness of Reits is also dependent on the strength of its sponsor.
6. Reit rules in Singapore
SGX listing rules for Reits have also kept them attractive:
7. What’s in it for investors?
While a separate asset class, Reits exhibit characteristics of both stocks and unit trusts.
Investors can benefit from investing in Reits through:
- Dividend income: rental income and any earnings from sales of real estate assets
- Professional landlord expertise: the day-to-day management is left to professional property managers
- Capital gains: when the Reit is sold at a higher price than the purchase price
Globally, Reits are viewed as an attractive “income investing” play as they have consistently delivered strong total returns (unit price appreciation + distributions to unitholders) over the past two decades.
In Singapore, Reits have averaged a dividend yield of between 4% and 6% in recent years, beating the average dividend yield of the STI, government bonds and term deposits.
8. Selecting Reits
In assessing which Reits to park your funds at, you can gauge the quality of the Reits’ property portfolios, its income characteristics, and the economic conditions.
Here are 3 questions to help you:
- To establish how secure the current income stream is, ask “What is the average term of the leases?”
- To discover the demand for a Reit’s properties, ask “What is the quality of the properties?”, and “Are the properties in a high growing sector and location, or vice versa?”
- To check out the competition, ask “What is the supply outlook for competing properties?”
Here's a video summarising some of key features of Reits covered in this article.
This is the 1st instalment in our series on S-Reits. If you’re keen to learn more about Reits, check out the other articles:
Part 2: The S-Reit landscape
Part 3: Practical ways to invest in Reits
Part 4: How to evaluate and analyse Reits
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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