That said, investing in Singapore properties was never easy. Most investors do not have the capital nor knowledge to be successful.
Today, we will show you how you can own real estate through an investment vehicle called Real Estate Investment Trust (REIT).
With REITs, aspiring investors like you, not need to worry about large capital requirements, house mortgage or need extensive knowledge in real estate.
Let’s jump right in, get you up to speed and kick start your REITs investing immediately.
Updated: 1 Jan 2022
What Are REITs?
Real Estate Investment Trusts (also commonly referred to as REITs) are listed companies that pool investors’ capital to invest, own and operate real estate properties.
Singapore-REITs are real estate investment trusts listed on the Singapore Exchange (SGX).
How do REITs work?
The properties are leased out to tenants in return for rents. Investors who invest in REITs are co-owners of the REITs. They are entitled to earn rental income from the property assets which are distributed regularly. The returns they earn from the investment is called distribution yield.
Aside from that, investors also stand to benefit from capital gains as the value of the property portfolio increases.
Although REITs may not be a common term for many non-investors, Singaporeans are no strangers to the properties owned or managed by these REITs.
You would probably have heard of these popular landmarks buildings;
Marina Bay Financial Centre is owned by Suntec REIT with 33% ownership. Suntec REIT is known for its commercial real estate portfolio. Currently, the REIT owns 11 properties at a valuation of approximately $11.5 billion.
Gleneagles Hospital is owned by ParkwayLife REIT . Plife REIT has a total portfolio size of 55 properties valuing at approximately S$2.04 billion which makes them one of the largest healthcare REITs listed in Asia.
Paragon is an upscale retail mall managed by SPH REIT . The REIT owns 5 properties, 3 of which are in Singapore – Paragon, The Clementi Mall and The Rail Mall. Its portfolio is valued at approximately $4.123 billion.
Why invest in REITs?
There are two main objectives for investing in REITs.
Steady and regular stream of
Gradual appreciation in
REITs vs Physical Properties
Buying REITs has often been seen as an alternative to buying physical properties.
But which is a better form of investment?
Let’s explore the pros and cons of investing in REITs.
Pros and Cons: REITs vs Physical Properties
In a nutshell
The combination of management fees and lower leverage power means that returns from REITs are unlikely to beat returns from property investments. However, the high leverage in property investments also means that it’s riskier.
Bad property investments can seriously damage an investor’s wealth. All in all, REITs provide an easy, low risk investment option to gain exposure to diversified portfolio of properties.
Types of REITs
#1 – Retail REITs
The shopping malls you visit are most probably owned by a retail REIT.
If you consider investing in these REITs, you should assess the health of the retail industry itself, as it is one of the major factors of your future profits. Keep in mind that retail REITs generate profits by renting space to its tenants. If their tenants have cash flow issues, they may not be able to pay their rent on time. Some of them may even default on their payment.
In such situations, the REIT has to find a replacement quickly, and this isn’t always possible. If you intend to invest in retail REITs, look out for those with very stable anchor tenants. Once you’re done with your analysis of the industry, you have to analyse the REIT itself. Look for signs of strong balance sheets, sustainable profits and little debt.
In a troubled economy, retail REITs with cash on hand will be able to purchase good real estate at discounted prices. Retail investors like yourself should take advantage of such situations.
#2 – Office REITs
These are the REITs that focus their investments in office buildings. Their income comes from the rental of office space.
The main advantage office REITs enjoy is that they usually deal with long term leases.
There are a few things to consider before investing in an office REIT:
- The state of the economy
- The unemployment rate and its trend
- The vacancy rates
- The economic well-being of the area in which the REITs makes its investments
- The capital available for acquisitions
- Office REITs may also be seen as a subset of industrial REITs.
#3 – Residential REITs
Residential REITs own and manage manufactured housing and rental apartments or buildings.
When analysing such REITs, consider how affordable homes are in the target area, compared to the country average. Wherever home affordability is low, the number of people who are forced to rent is higher, thus increasing the rental prices. As a result, most major residential REITs focus on big urban areas.
Investors also look at population and job growth. Cities with booming economies attract more people, therefore bringing a higher demand for rental homes.
Rising rents combined with low supply are ideal conditions for residential REITs.
#4 – Hospitality REITs
These REITs hold properties in the hospitality sector such as hotels, budget accommodations, serviced apartments or short term lodging facilities.
It may sound attractive to be able to own hotels through Hospitality REITs, but there are a few considerations you will have to think about as well.
You have to understand how the hospitality sector is doing.
When the economy is poor, the hospitality sector would be expected to face lower sales and occupancy rates, especially if the hotel is focused on tourism.
It is good to take a look at the properties owned by the hospitality REIT and understand its average occupancy rate. As these properties are sustained by short term stays and lease, their performance can be volatile and highly affected by economic movements.
#5 – Industrial REITs
Industrial REITs manage and own industrial facilities, they rent these spaces to their tenants.
Some of the spaces are warehouses, distribution centres and specialised facilities.
It’s important to take a look at the spaces and facilities that these REITs own and understand the industry players who are renting the spaces. Also note that due to the massive volume of space each facility holds, losing a tenant might be a huge problem for industrial REIT with little assets.
Industrial properties generally have shorter leases and 30 years are typical. As such the property value depreciate faster and investors are compensated with higher yields.
#6 – Healthcare REITs
Healthcare REITS focus their investments in various medical facilities such as hospitals, medical centres, nursing homes and retirement facilities. Their success is tightly connected to the evolution of the healthcare system.
When looking to invest in healthcare REITs, you should choose REITs that have both:
- A diversified group of clients
- A wide range of property types.
Also check that the REITs of your choice have significant healthcare experience.
As with stocks, investors can either choose to analyse and invest in individual REITs or invest in a basket of REITs through the use of ETFs.
ETFs are passive funds that aim to emulate the results of their underlying indices. There are four REIT ETFs listed on the SGX for investors to choose from.
- Lion-Phillip S-REIT ETF
- NikkoAM-Straits Trading Asia Ex-Japan REIT ETF
- Phillip SGX APAC Dividend Leaders REIT ETF
- CSOP iEdge S-REIT Leaders Index ETF (new)
Lion-Phillip S-REIT ETF
NikkoAM-Straits Trading Asia Ex-Japan REIT ETF
Phillip SGX APAC Dividend Leaders REIT ETF
CSOP iEdge S-REIT Leaders Index ETF
Morningstar® Singapore REIT Yield Focus Index
FTSE EPRA Nareit Asia ex Japan Net
Total Return REIT Index
iEdge APAC Ex-Japan Dividend Leaders REIT Index
CSOP iEdge S-REIT Leaders Index
12-month Dividend yield
(as of Nov 2021)
Expense Ratio (p.a.)
P.S. If you prefer to invest in a REIT ETF, read our Singapore REIT ETFs guide for a detailed comparison.
Roboadvisors with REITs Portfolio
Syfe, a licensed roboadvisor, has launched a REIT portfolio for investors to invest conveniently with enhanced risk management.
The Syfe REIT+ portfolio lets you choose between a portfolio of Singapore REITs or a mix of Singapore listed REITs and Singapore Government bonds. This weightage would shift between REITs and bonds depending on the market condition. Such portfolio rebalancing is done automatically by Syfe without the investor having to worry about it.
Alvin interviewed Syfe’s CEO to learn more about their methodology:
At the point of writing, the indicative dividend yield was between 3.3% – 4.5% and investor has a choice to decide between receiving the dividends in cash quarterly or have them automatically reinvested.
Investors can also choose to invest lump sum or on a monthly basis, and there is no minimum amount to start.
Syfe charges 0.4% to 0.65% annual fee for the service, depending on the amount invested.
Glossary of REIT Terms
Distribution Per Unit (DPU)
DPU is known as distribution per unit. It tells investors how much dividend they would get for every unit of the REIT they own.
DPU = Total Distribution ÷ Number Of Shares.
Net Asset Value (NAV)
Net Asset Value gives us an indicative value of what investors would get if the REIT liquidates all of its assets and pays off its liabilities.
NAV Per Share = (Assets Market Value – Liabilities Value) ÷ Number of Shares.
Since most of a REIT assets are investment properties, the NAV is close to the net valuation of the underlying properties it owns. Hence, investors often compared to the REIT price to its NAV. Crudely speaking, the REIT is selling at undervalued prices when the REIT price is less than its NAV.
Revalued Net Asset Value (RNAV)
RNAV is similar to NAV except that the assets and liabilities are adjusted to reflect recent market values.
RNAV Per Share = (Revised Assets Market Value – Revised Liabilities Value) ÷
Number of Shares.
A REIT’s gearing ratio usually refers to this formula:
Gearing (Debt Ratio) = Total Debt ÷ Total Assets
Gearing is a metric used by investors to access a REIT’s financial leverage.
A company with high gearing is said to be more vulnerable during a recession as it has to continue to pay interest no matter how bad the earnings are.
Should the REIT be unable to pay its interest or principal on time, the REIT may fold up. Since July 2015, MAS has imposed a gearing limit of 45% for all REITs.
Average interest rate
The average interest of a REIT measures how expensive their loans are from the banks they borrow the money from. The higher the interest rate, the more expensive the debt funding is.
A research report of REITs dated 2 Jan 2019 by DBS Group Research can give you an idea of how typical numbers can look like when you compare the average interest cost of the REIT against each other:
It should be interesting to note from the above table that Ascendas India Trust attracts high rates because Indian interest rates tend to be higher than in other countries.
Weighted Average Debt Maturity (WADM)
REITs have to gear up to invest in the capital intensive properties. Each debt has its own tenure and maturity dates.
REITs would usually rollover their debts as each one matures. But that comes with risk as interest rate might be higher or some of the terms may become more onerous. Worst is that the REITs couldn’t borrow the amount that they intended.
WADM gives a REIT investor an indication how much debt is due. It is expressed in years. For example, 4.3 years means a large chunk of loans are likely to be settled in about 4 years time. Hence, longer WADM is better than shorter WADM generally speaking.
Weighted Lease Average Expiry (WALE)
Weighted Lease Average Expiry (WALE) is a metric used by investors to access the likelihood of REITs’ properties portfolio being vacant. As we all know, income generated by REITs is derived from leasing out spaces. Hence, occupancy would hurt REITs’ earnings and therefore resulting in a distribution loss.
There are two ways to measure WALE. Either by using Net Lettable Area (NLA) or Gross Income, measured across all tenants’ remaining lease in years.
An example based on WALE (Gross Income):
- Property #1: 15% of gross rental income with 5 years of remaining lease term
- Property #2: 70% of gross rental income with 2 years of remaining lease term
- Property #3: 15% of gross rental income with 10 years of remaining lease term
Therefore, the WALE (Gross Income) is:
(0.15 * 5) + (0.7 * 2) + (0.15 * 10) = 3.65 years
What it tells us is that the average lease expiry of the properties portfolio is 3.65 years.
An example based on WALE (NLA):
- Property #1: 25% of the area expiring in 4 years
- Property #2: 75% of the area expiring in 8 years
WALE (NLA) = 25% x 4 years + 75% x 8 years = 7 years
As with all metrics, the figure has to be measured across similar sectors to conclude whether it is over or below the industry average.
High WALE implies stronger income protection due to later lease expiry term. However, the main downside is that the REIT is not able to capitalise on the higher rental during a market boom as its average lease expiry is longer.
Low WALE, on the other hand, has higher susceptibility towards rental market movement as shorter expiry term means frequent rental renewal. This allows the REIT to capitalize on higher rental but at the same time means that it is susceptible to a lower rental yield during bad times.
Rental reversions measure the changes in rental rates when expiring leases become renewed. A positive rental reversion rate is good for the REIT because it signifies that new tenants are willing to pay higher rents compared to existing tenant rates. Similarly, negative rental reversion rates may signify flagging demand or oversupply in the rental markets.
Net Property Income (NPI)
You can measure the NPI of a REIT by taking the gross revenue (arising from rentals) and deducting maintenance costs, property taxes and other miscellaneous operating expenses. NPI is an absolute measure in dollars that gives us an idea about how lucrative the REIT properties are. A more meaningful way for a retail investor to understand NPI is to look at how much it has changed over time. Increases in NPI of a REIT bode as for investors of the counter.
Capitalization Rate or Property Yield
Capitalization rate is a measure of the property income yielding capability.
Cap rate = Net Operating Income ÷ Property Value
Most REITs have their individual property Cap. Rate stated in their annual report.
A high Cap. Rate suggests either the REIT managers’ abilities to negotiate for higher income or could also mean the property value has depressed.
The occupancy rate of a REIT measures the proportion of the lettable area that is currently occupied by a tenant. A 100% occupancy means that the property is fully occupied and has no more room for new tenants. A low occupancy rate of 60% may signify a poor location and lack of demand by the potential tenant.
Asset Enhancement Initiative (AEI)
Refurbishment, revamp, and upgrades of existing property assets are examples of Asset Enhancement Initiatives.
The goal is to optimise the value of a REIT’s existing asset properties value to
increase rental income. This is very common in Singapore, especially in
REITs Fee Structure
The REIT manager is akin to a fund manager, making all the investment decisions on behalf of all the unitholders.
- Base Fee: 0.25% – 0.5% per annum of Deposited Property
- Performance Fee: 3% – 4% of Net Property Income
- Acquisition Fee: 1% of property value
- Divestment Fee: 0.5% of property value
The property manager is akin to a facilities manager, maintaining and operating the properties under their watch.
- 2% – 3% of gross revenue and/or
- 2% – 3% of Net Property Income or leasing commissions
The trustee role is usually performed by a bank. It is necessary because the bank act as an independent party to the REIT manager, a check and balance when it comes to handling unitholders’ funds.
- 0.01% – 0.1% of assets or Deposited Property
How do REITs increase their value?
Acquisition -> Organic Growth -> AEI -> Unlock Value -> Recycle Capital
How do REITs raise funds?
REITs often have to raise funds to acquire new properties. This is because there isn’t sufficient retained earnings due to the regular large dividend distributions.
There are a few ways REITs can carry out their fundraising.
Debt is usually the first option and the underlying properties are being collateralized to secure a lower interest rate with the banks.
However, REITs in Singapore can only gear up to a maximum 45% debt-to-asset ratio. This would limit the ability of REITs to borrow more money.
2) Rights Issue
REITs are likely to turn to rights issue when there are insufficient debt room to borrow.
A rights issue is a right to buy additional shares / units in a REIT. It is issued to the REIT’s existing unit holders, usually at a discounted market price in proportion to their holdings.
For example, a rights issue of 1:4 means for every four shares you own, you have the option to purchase 1 share at a discounted price as stated in the rights issue.
An unitholder can choose to subscribe or not. The latter would mean that he would suffer dilution as the percentage ownership of the REIT would shrink since more units would be created.
An unitholder may also choose to subscribe more units and may be granted the rights if other unitholders decided not to take them up.
REITs often use rights issue to raise capital for potential acquisition which are deemed to be yield accretive. Unlike raising through debt, rights issue does not increase the financial gearing of the REITs. In fact, it lowers the gearing.
3) Perpetual Securities
There were instances whereby REITs issued perpetual securities to raise funds. They promised a fixed interest rate like a bond but they are treated as equity. Hence they are not counted as debt and do not increase the gearing ratio. This seems like sidestepping the gearing criterion and investors could always treat it as debt to be conservative.
How to select REITs?
There are many ways to select REITs. This section describes just one of the ways to select or analyze the REITs market to generate superior returns.
Unlike perhaps many suggestions offered by other information sources from the internet. We begin without any preconceived notions as to which strategies work in the Singapore markets for local REITs. Instead, we will test each strategy before deciding which strategy works.
Another feature of employing this strategy is that we can avoid a deep discussion on the relative merits of each REIT counter using this approach. Beginners need a safe way to be able to obtain dividend income without a long-drawn discussion into issues such as lease expiry, tenant mix and sensitivity of bank loans to interest rates.
Here is our approach to REITs selection:
Step 1: Start with a universe of all REITs
The first step would be, to begin with, a universe of REITs. This is a small universe of 43 stocks when this article was written. The first we do is to create a baseline that looks at Singapore REIT performance across different time frames. In an actual course on investing, we cover multiple time frames but for this example, we consider the timeframe over 10 years ending 31 December 2019.
For the 10 years ending 31 December 2019, investing in an equal-weighted REIT portfolio returned 12.67% and has a semivariance (or downside risk) of 8.47%.
Step 2: Backtest different investment factors
The next step would be to select from this half of the REITs universe 21-22 counters with a superior factor to see whether the 10-year performance improves. Suppose we want to see whether REITs with higher dividends do better than average, we will select 21 REITs with the highest dividends and back-test this result on Bloomberg to see what kind of returns we get compared to our baseline earlier.
We examine a huge range of factors. For this article, we only ask the question of whether high dividends or low gearing have done well over the past 10 years.
Our results are as follows:
Half of the REITs with the highest dividends
Half of the REITs with the lowest gearing
From our observations, we can note the high dividend strategy would not only give us lower overall returns, they are more volatile with higher downside risk. For months, retail investors have exhausted the high yielding strategy that it no longer works in the markets. Instead, by choosing a REIT with a lower gearing (or lower debt over assets), we might still be able to have superior returns although it corresponds to taking on higher risk.
Step 3: Backtest combinations of factors
If one factor will reduce the REITs universe by half and give us decent performance, can we find a different factor to improve the performance further?
This requires painstaking back-tests over hours on Bloomberg terminal to determine a combination of factors that lead to superior performance.
For example, superior performance can be derived from shortlisting the REITs with the lowest PE ratio followed by the lowest BETA or volatility relative to the rest of the stock market.
Our back-tested performance was 16.10% with a downside risk of 8.7%. This is a decent strategy to run our REIT portfolio.
Step 4: Screen stocks with a proven set of factors
Now we will screen for the REITs that meet our criteria.
We use a tool normally employed by retail investors like Stocks Café or REIT Screener to screen our REITs. In this example, we choose the 20 REITs with the lowest PE ratio, then we choose the REITs with the lowest BETA.
- Frasers Centrepoint Trust
- ParkwayLife REIT
- First REIT
- Cromwell REIT SGD
- Sabana REIT
- MapleTree Com Trust
- BHG Retail Trust
- EC World REIT
Step 5: Apply qualitative analysis
With a much shorter list, a retail investor can begin to search for brokerage reports to review each REIT for suitability. At this stage, an investor can go deep into deciding which REIT to buy. Depending on his experience, he can look into multiple factors before making his final decision.
There is a much lower risk of making a mistake in stock-selection. As most of the heavy lifting was done by the qualitative back-testing, absent a glaring possibility of mismanagement, or brushes with the law, the REIT is normally safe to invest in.
Interestingly, the screened portfolio resembles a barbell REIT portfolio with safe stalwarts like ParkwayLife REIT and high yielding REITs like EC World REIT. This was not a property anticipated before running the stock screener.
In this example, we are more likely to eliminate BHG REIT and tolerate the rest due to the absence of analyst reports on the counter.
In practice, we will review a combination of as much as 10 factors over 3, 5 and 10-year histories. Short-listed factor combinations are democratically voted into a class portfolio before the class is broken into teams that will then research each counter aggressively.
Interested to learn how this works in the real stock market? Christopher Ng shares how manages his dividend portfolio using the principles shared in this section. Join him in a free live webinar to learn more.
How to increase dividend yield with leverage
Extending the example earlier, you would have a REIT strategy with a return of 16.10% and a downside risk of 8.70%. As it is a REIT portfolio, it should comfortably generate 6% dividends to give you an incentive to stay invested.
You can supercharge the portfolio by leveraging it and adopt a Leverage REIT strategy to reach their goal of financial independence much earlier.
Typically, when we leverage an investment, for each $1 we have injected into the portfolio, we can borrow another $1 from the broker to make the portfolio larger. The broker will not do this for free but will charge about a 3.5% interest rate on your borrowings.
The first effect of leverage is that the dividends you will receive from your investments will increase. In this example, your capital will give you a yield of 6%. The amount borrowed from the broker invested in the same portfolio will give you another 6%. The broker will then charge you 3.5% for lending money to you.
The yield you will receive from your initial investment is:
So $100,000 invested in this strategy buying $200,000 of REITs would generate $9,500 of dividends a year after paying off the interest to the broker.
The second effect is that your leveraged returns will be phenomenal after accounting for capital gains. Accounting for both dividend yields and capital gains, the back-tested strategy returns 16.10%.
If you leverage by borrowing $1 for each $1 you have, your gains will potentially be:
16.10% x 2 – 3.5% or 28.7%!
So $100,000 invested in this strategy buying $200,000 of REITs would generate $9,500 of dividends a year after paying off the interest and also $19,200 of capital gains.
The problem of leverage is that it comes with risks that are hard to stomach for most retail investors.
In the above example, if your portfolio loses 30%, you will receive a margin call. If you cannot service your margin call within 48 hours, the broker can liquidate your investments and you will be stuck with a 60% loss of your initial investment.
This is why knowing the returns and downside risk is very important. If we plot a normal distribution curve using returns of 16.10% and downside risk of 8.7%, we will find that the probability of losing 30% in any particular year is close to 0. This gives us a degree of confidence that this Leveraged REIT strategy is safe.