Deconstructing REITs

Deconstructing REITs

Singaporeans want to own more property, but in today’s market it’s becoming a challenge to get a piece of the pie. REITs might just be your answer on how to become a landlord and own a slice of it all.

 

What’s a REIT exactly?

A Real Estate Investment Trust, or REIT, is an investment trust that owns or operates real estate properties on behalf of its shareholders. In Singapore, REITs typically invest in shopping malls, residential properties, offices, industrial facilities, hospitality and healthcare properties.

Where can I get REITs?

REITs are traded on the stock exchange, and an investor that buys a REIT becomes effectively a co-owner of the property. This allows the investor to benefit from the rental income and any earnings from sales of real estate assets, while leaving the day-to-day management to professional property managers.

For those new to REITs, they own many well-known developments across Singapore. For example, Marina Bay Financial District is owned by Suntec REIT while Gleneagles Hospital is owned by Parkway Life REIT. Most shopping malls in Singapore are also owned by REITs including Paragon (SPH REIT), Plaza Singapura (CapitaLand Mall Trust) and the island’s biggest mall - VivoCity (owned by Mapletree Commercial Trust).

Here’s the appeal

REITs allow an investor who is unable to afford direct investments into properties an easy way to add real estate exposure into their investment portfolio. Most REITs own multiple properties sometimes even outside of Singapore, so investing in a REIT can allow investors to diversify beyond their existing investments.

As they are traded on the stock exchange, the process of buying and selling a REIT is also flexible and transparent. In Singapore, like many other countries, REITs are also required to distribute at least 90% of their income each year back to shareholders. What’s more, this distribution is tax-exempt for the shareholder, further adding to the appeal of REITs.

There are more than 30 REITs listed on the local exchange and the major players include CapitaLand, Mapletree, Keppel and Frasers. Some REITs have sponsors (normally the property developers) who provide backing to the REIT by injecting their own properties into the trust, along with future developments. For example, CapitaLand developed the Westgate shopping mall and then added it in the CapitaLand Mall Trust portfolio.

No investment is risk-free

As with any investment, investing in REITs also carry risks. Understanding what these risks are and how much risk you are willing to take on as an investor is an important step before you make your investment.

Simply accessing a REIT based on the amount of dividend it pays is not sufficient. Other factors like how the economy or the industry is doing, and the effectiveness of the property manager could all impact the long-term growth of the REIT.

So it’s wise to do your homework. Find out the quality and lease lengths of the underlying properties. Also look at how much debt the REIT has. Familiarise yourself with the REIT by understanding what it invests in, the different markets it operates in as well as the expected frequency and timing of dividend payouts.

Investments can be complicated – especially when you’re trying out for the first time – but REITs are different. Not only do you get price-transparency and frequent price updates since REITs are traded on the stock exchange, your money is more liquid than investing directly in property. While they should still be viewed as a long-term investment, the regular income they can provide is an attractive bonus.

 

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