What are REITs?
Real Estate Investment Trusts (REITs) are companies that own and operate a portfolio of income-producing real estate. In 2002, the first REIT CapitaLand Mall Trust was listed on the Singapore stock market. It remained the only REIT on the Straits Times Index (STI) all the way until 2014 when Ascendas REIT joined in. Since then, REITs have gained popularity in Singapore as an investment vehicle.
Types of REITs
REITs in Singapore: First REIT, Parkway Life REIT
Healthcare REITs manage healthcare facilities, which include hospitals and nursing homes. With Singapore currently facing an ageing population, healthcare demand is sure to go up in the coming years. Additionally, Singapore’s medical tourism has always been one of the strongest in the region, pointing to the robustness of the healthcare industry.
REITs in Singapore: Keppel DC REIT, Mapletree Industrial Trust, Sabana REIT, Ascendas REIT
Industrial REITs manage properties that fall under industrial uses, which include warehouses, manufacturing centres and business parks.
REITs in Singapore: CapitaMall Trust, SPH REIT, Frasers Centrepoint Trust, Lippo Malls
Retail REITs manage retail malls, and any mall you go to is likely owned by a REIT. Investors can easily do site visits by going down to the malls owned by the REITs and gauging for themselves the performance of the mall. However, traditional brick-and-mortar retail malls have faced serious competition from the rise of e-commerce in recent years. This has led to the decline of some malls, with the threat of economic obsolescence looming closer. Physical malls have to redevelop, adopt asset enhancement initiatives or come up with creative placemaking to attract visitors.
REITs in Singapore: CapitaLand Commercial REIT, Frasers Commercial Trust
Commercial REITs manage office buildings. According to a report by Colliers, it is expected for CBD Grade A supply to be muted from 2019 to 2021, with the next major hike in supply expected in 2022. The “flight-to-quality” trend is still very much prevalent in the office market, whereby tenants move from older Grade B office buildings to newer Grade A office spaces. Grade B offices and older Grade A offices have to redevelop in order to entice tenants to move back.
REITs in Singapore: CDL Hospitality Trust, OUE Hospitality Trust, Ascott Residence REIT, Ascendas Hospitality Trust, Frasers Hospitality Trust, Far East Hospitality Trust
Hospitality REITs manage properties such as hotels and serviced apartments. Since the hospitality sector is wholly dependent on tourist arrivals, the health of Singapore’s tourism is essential to hospitality REITs. Singapore is fortunately regarded as one of the top tourist destinations in the region and has been ranked by Euromonitor as the 4th most visited city in the world in 2017. This indicates that hospitality REITs will continue to do well.
REITs VS Direct Property Investment
REITs own a portfolio of properties and will, therefore, provide diversification benefits versus if you were to invest in a single property. Diversification is beneficial because it reduces the non-systemic risk of an investment. What this means is: say you invest in a retail mall, but the next day you find out that there will be a newer mall built right next to your mall, which will probably cause the value of your mall to decrease due to the heightened competition. Diversification would negate the impact of such risks because the risk is “spread out” over a number of properties. Therefore, for investors with lower risk appetites, REITs will be a better choice compared to direct property investment.
Liquid assets are more easily converted into cash compared to non-liquid assets. Since REITs are listed on the Singapore stock exchange, trading units of a REIT is easy and quick. Investors can convert the units of a REIT they hold into cash, should they need to. However, a direct property investment does not offer such luxury, because there are many more legal processes and parties involved in the divestment of a property. For shorter-term investors, REITs can definitely be more suitable.
Investors enjoy tax-exempt dividend distributed by REITs, while direct property investment will incur heavy taxes such as stamp duties and property taxes.
Allows access to large real estate assets for smaller investors
Direct investment into property requires large amounts of capital, which not everyone possesses. Such a large sum will also represent a huge commitment, requiring a lot of planning and decision making. REITs provide a way to invest in property in “digestible” chunks. An investor that could not normally afford to buy an entire property as an investment can still gain real estate investment exposure through REITs.
REITs VS Property Stocks
|Business Focus||Income-generating properties||Companies are free to engage in all property-related investments. Some companies may diversify into other industries|
|Trust Structure||Properties are held in trust by a trustee, which is commonly a bank or financial institution||None. Properties are held and owned solely by property companies|
|Investment and Development Restrictions||REITs have a leverage limit of 45%. REITs are also subject to a development limit, whereby they can undertake development activities up to a maximum of 25% of its deposited property.||None|
|Tax Transparency (Dividend)||MAS regulates REITs, and requires them to pay at least 90% of their taxable income each year in the form of dividend to unitholders before REITs are able to enjoy tax exemption||None. Dividends are decided by the company’s board|
Property stocks and REITs have similar advantages, whereby they are both liquid, diversified (depending on the property firm) and accessible to all types of investors. However, the difference between REITs and property stocks (other than those highlighted in the table above) is that REITs have stable and high dividend yields, whereas property stocks have capital appreciation or growth potential.
Of course, this is dependent on the different firms and will not be true for all REITs and property stocks, but it is still the general sentiment. Because REITs are entirely focused on income-producing properties, they generally have less variability in income. Property companies engage in a greater range of investment activity and therefore may trade stability off for potentially greater profit.
The Verdict on REITs
Regardless of investment profile and objective, REITs will undoubtedly be a good addition to any investment portfolio. Real estate has long been regarded as a good hedge against inflation and an effective defensive asset, and REITs are a good way to gain exposure to real estate assets.