REITs might be one of the easiest ways to invest in real estate, but there’s more to them than meets the eye.
With Singapore property prices rising, getting into real estate can feel impossible – but REITs offer a low-capital, high-yield alternative.
In this post, you’ll learn:
- What REITs are and how they work
- Key factors to consider when investing
- Types of REITs in Singapore and their risks
Curious about how to start earning passive income from properties without buying one?
Keep reading to find out!
What are Real Estate Investment Trusts (REITs) & how does it work?
Real Estate Investment Trusts, or REITs, are investment vehicles that allow you to invest in income-generating properties without the hassle of managing them yourself.
Think of it as owning a small part of a shopping mall, office building, or even a hotel, but instead of dealing with the day-to-day, you leave that to the professionals.
REITs pool together capital from investors like you and me – just like a unit trust – using that to purchase and manage a diverse portfolio of properties.
In Singapore, REITs are listed on the Singapore Exchange (SGX), which means you can buy and sell shares like stocks.
And the best part? REITs pay out rental income, typically on a quarterly or semi-annual basis.
Now, Singapore REITs (S-REITs) have some strict rules to keep things stable for investors.
They are required to distribute over 90% of their taxable income as dividends.
Additionally, their debt levels are capped at 50% of total assets to maintain financial health.
Lastly, they are limited to investing no more than 25% of their total assets into property development, focusing strongly on income-generating properties.
Types of REITs listed in Singapore
Retail REITs
Retail REITs invest in shopping malls, retail outlets, and sometimes even supermarkets.
These REITs reflect the health of consumer spending – when people shop, retail REITs tend to perform better.
Anchor tenants, like major supermarket chains or popular retail brands, help secure stable income for these REITs, making them an attractive option for investors looking for consistent returns.
Office REITs
Office REITs, or commercial REITs, invest in office buildings, often located in central business districts (CBDs) or prominent business hubs.
These properties usually come with long-term leases, providing a steady income stream for investors.
The performance of office REITs is tied to local employment rates and corporate demand for office space – if companies are growing, they’ll likely need more office space, which boosts rental income.
Industrial REITs
Industrial REITs invest in properties like warehouses, logistics centres, and manufacturing facilities, making them an essential part of the logistics and supply chain industry.
These properties are vital for storing goods, processing products, and facilitating global trade.
Industrial REITs are especially appealing to investors who want exposure to the fast-growing logistics sector, which has boomed with the rise of e-commerce.
However, Industrial REITs are not immune to economic fluctuations.
When global trade slows or manufacturing output drops, the demand for these facilities can be affected.
Hospitality REITs
Hospitality REITs invest in hotels, resorts, and other short-term accommodation properties, with performance closely tied to tourism and the overall health of the economy.
When tourism thrives, so do hospitality REITs – think of the bustling hotel industry in Singapore during the Formula 1 season or major international events.
However, during economic downturns or when travel restrictions are in place, as seen during the pandemic, hospitality properties can struggle.
These REITs are highly sensitive to seasonal and economic cycles, meaning their performance can fluctuate more than other REIT types.
Healthcare REITs
Healthcare REITs are a unique category of REITs that invest in properties like hospitals, nursing homes, and specialised healthcare facilities.
These REITs stand out because they tap into the ever-growing demand for healthcare services, driven by ageing populations and the increasing need for medical care.
In a country like Singapore, where the proportion of elderly citizens is rising, Healthcare REITs offer a stable and resilient investment option.
Since healthcare services are essential and largely unaffected by economic downturns, the demand for these facilities tends to remain consistent.
Diversified REITs
Diversified REITs manage a mixed portfolio of properties across different sectors – such as retail, office, industrial, and even residential spaces.
This diversity spreads the risk and can provide more stable and balanced returns for investors.
Instead of relying on the performance of one type of property, diversified REITs benefit from multiple real estate segments, helping to cushion the blow if one sector underperforms.
Data centre REITs
Data centre REITs focus on owning and managing IT infrastructure facilities, including data centres that support the storage, processing, and distribution of digital information.
With the world rapidly moving towards digital transformation, cloud computing, and big data, the demand for data centres has skyrocketed.
This is where data centre REITs step in, providing the essential infrastructure for companies and governments to manage their digital assets.
As more businesses shift towards cloud computing and adopt digital solutions, data centre facilities have become indispensable.
These REITs benefit from long-term leases with major tech companies, ensuring a steady income stream.
Residential REITs
Currently, Singapore does not have any residential REITs.
The last residential REIT, Saizen REIT, was delisted in October 2017 after the sale of its Japanese residential assets.
Saizen REIT primarily focused on owning residential properties in Japan, providing investors with exposure to the residential rental market there.
REITs ETFs
While not exactly the same as a traditional REIT, Real Estate Investment Trust Exchange Traded Funds (REIT ETFs) are a great option if you’re looking for the benefits of investing in REITs but with added simplicity and diversification.
Essentially, a REIT ETF bundles together multiple REITs into a single investment, allowing you to gain exposure to various REITs without having to pick and choose individual stocks.
Why invest in REITs?
Real estate exposure
REITs give you direct exposure to the real estate market, allowing you to own a share in a diversified portfolio of properties.
This kind of exposure is particularly valuable in Singapore, where real estate consistently performs well, providing steady rental income and long-term capital appreciation.
Unlike owning a single property, REITs spread the risk by holding multiple properties in their portfolio.
This diversification helps protect your investment from the ups and downs of individual properties or sectors.
For example, if retail REITs experience a downturn due to changes in consumer behaviour, industrial or office REITs in your portfolio could balance out the overall performance.
Low capital needed
While buying a property in Singapore often requires a significant down payment, you can start investing in REITs with just a few hundred dollars.
This makes REITs accessible to retail investors who want to dip their toes into the real estate market without needing millions for a direct property purchase.
You benefit from the rental income these properties generate, but you only need to invest a small fraction of what it would cost to buy a property outright.
Diversification
When you invest in a REIT, you’re not putting all your eggs in one basket.
Instead, REITs expose you to various real estate sectors – retail, office, industrial, hospitality, and more – spreading your risk across different property types.
Diversification is key in real estate investing, and REITs make it easy for you to access a broad range of properties, even across different geographical regions, without needing to invest in each one individually.
Liquidity
If you’ve ever tried selling a house, you know it can take months to find a buyer and finalise the deal.
REITs, on the other hand, offer liquidity that physical real estate simply can’t match.
REITs are traded on stock exchanges like the Singapore Exchange (SGX), like any other share.
This means you can buy and sell REITs with the click of a button, providing you with far more flexibility and quick access to your money when needed.
No waiting around for months, no complex legal processes – just efficient and straightforward transactions.
Professionally managed
Managing a property can be a full-time job, from finding tenants to handling maintenance and repairs.
With REITs, all these day-to-day responsibilities are taken care of by professional managers.
Professional management means that your REIT investments are being looked after by specialists who know the market inside out.
They work to maximise returns by making informed decisions about which properties to buy, sell, or improve, and they ensure that properties are well-maintained and tenants are satisfied.
What are the risks of investing in REITs?
Market volatility
REITs, like stocks, are traded on the stock exchange, which means they are subject to market volatility.
Factors such as economic downturns, changes in government policy, or global events (like COVID-19) can cause REIT prices to fluctuate.
Even though REITs are backed by tangible real estate assets, they are still vulnerable to the broader market’s ups and downs.
Interest rates risk
When interest rates rise, borrowing costs increase, negatively impacting REITs, as these trusts often rely on debt to finance their property acquisitions.
Higher interest rates can also reduce investor demand for REITs, as the yields they offer become less attractive compared to safer fixed-income investments like bonds.
Additionally, higher interest rates may cause property values to decline, as buyers factor in the increased cost of borrowing into their purchase decisions.
Economic uncertainty
REITs, like most investments, are sensitive to the overall health of the economy.
When economic conditions are favourable – businesses are expanding, employment is high, and consumer spending is strong – REITs tend to perform well as demand for commercial spaces, office buildings, and retail outlets rises.
However, during periods of economic downturn or uncertainty, REITs can suffer.
Reduced consumer spending can hurt retail REITs, while a slowdown in business growth might lead to lower occupancy rates in office REITs.
Moreover, a weak economy often leads to tenant defaults, rent reductions, or vacancies, directly affecting the income a REIT generates and distributes to investors.
Leverage risk
Most REITs rely on borrowing to acquire and develop properties, which means they operate with a certain level of debt, known as gearing.
While debt can help REITs grow their portfolios and generate higher returns, it also adds an element of risk.
When a REIT is highly leveraged, it becomes more vulnerable to interest rate hikes or refinancing difficulties.
Higher interest rates increase the cost of borrowing, which can reduce profitability and squeeze dividend payouts.
Additionally, if a REIT’s properties fail to generate sufficient income to cover its debt obligations, it could face financial strain, leading to potential losses for investors.
Refinancing risk
REITs often take on debt to grow their portfolios, but this debt typically has a maturity date, meaning it must be refinanced when it comes due.
The risk arises when market conditions change, making refinancing more expensive or, in some cases, difficult to secure.
If interest rates rise or the REIT’s financial health deteriorates, refinancing terms may become less favourable.
This could lead to higher borrowing costs, reducing the REIT’s profitability and, in turn, affecting dividend payouts to investors.
Additionally, if credit markets tighten or the REIT has a high level of debt due to be refinanced at once, the risk of being unable to roll over that debt becomes higher.
Concentration risks
Concentration risk arises when a REIT’s portfolio focuses on a specific property type, geographical location, or tenant.
This lack of diversification can expose the REIT to higher risks, as poor performance in one sector or region can significantly impact the overall portfolio.
How do I select the best REITs to invest in?
Net asset value (NAV) per share
The Net asset value (NAV) represents the value of a REIT’s assets minus its liabilities.
To calculate this, divide the total NAV by the number of outstanding REIT shares.
If the REIT’s market price is lower than its NAV per share, it may be considered undervalued, meaning you’re getting more value for your investment.
Conversely, if the REIT trades above its NAV, it may be overvalued.
Weighted average lease expiry (WALE)
Weighted average lease expiry (WALE) is the average length of time until the leases in a REIT’s portfolio expire, weighted by the income or size of each lease.
Essentially, it gives you an idea of how stable the REIT’s rental income will be over time.
A longer WALE indicates that most of the REIT’s tenants are locked into longer-term leases, providing more stability and predictability regarding rental income.
A shorter WALE, on the other hand, could indicate higher tenant turnover or that the REIT may need to renegotiate or replace leases more frequently, which could pose a risk during economic downturns.
Financial performance
When selecting the best REIT to invest in, it’s crucial to measure the following 2 metrics to examine its financial performance.
The fund from operations (FFO) measures the cash generated from a REIT’s operations, excluding gains or losses from property sales.
It provides a clearer picture of how much income the REIT is producing from its rental properties.
The adjusted funds from operations (AFFO), on the other hand, adjusts FFO by accounting for capital expenditures and maintenance costs.
This gives you a more accurate view of the REIT’s long-term cash flow stability.
A REIT with strong and growing FFO and AFFO figures is typically more financially stable and better positioned to provide consistent returns.
Distribution yield & payout ratio
The distribution yield tells you how much income you can expect to receive based on the current market price.
REITs are known for their high yields because they must distribute a significant portion of their taxable income – at least 90% in Singapore – as dividends.
However, it’s important not to get blinded by a high yield alone.
A REIT’s payout ratio, which shows the percentage of earnings paid out as dividends, should be balanced with the yield.
A REIT with an excessively high payout ratio may not have enough retained earnings to reinvest in its properties or handle unexpected expenses, which can affect future performance.
Gearing ratio
The gearing ratio measures the level of a REIT’s debt relative to its total assets.
It shows how much the REIT relies on borrowed funds to finance its property portfolio.
A lower gearing ratio indicates that the REIT has less debt, which generally reduces the risk for investors.
Lower reliance on debt means the REIT is more likely to weather economic downturns or interest rate hikes.
Interest coverage ratio
The interest coverage ratio (ICR) measures how easily a REIT can meet its interest payments on outstanding debt.
The ICR is calculated by dividing a REIT’s earnings before interest and taxes (EBIT) by its interest expenses.
A higher interest coverage ratio suggests that the REIT is comfortably generating enough income to cover its debt obligations, indicating better financial health and a lower risk of default.
Capital management
When assessing REITs, you want to look for those that demonstrate efficient handling of debt and capital.
This means they not only manage their existing debt wisely but also raise and deploy capital strategically to grow their portfolio and maximise returns for investors.
A well-managed REIT should balance using debt for growth and maintaining financial flexibility.
Efficient capital management ensures that a REIT can continue growing while keeping risks in check, even during challenging economic periods.
Economic & sector trends
The performance of REITs is often influenced by economic and sector-specific trends, so it’s essential to consider the broader landscape when selecting REITs.
How do I start investing in REITs in Singapore?
Investing in REITs in Singapore is a relatively straightforward process.
Start by opening a brokerage account, explore and research different REITs, make your first trade, and then keep an eye on your investments as they grow!
If you’re unsure where to start, check out our guide on how to buy REITs in Singapore.
Read our picks for the best brokerage accounts in Singapore here.
Who should consider investing in REITs?
Income-focused investors
Since Singapore REITs (S-REITs) must distribute at least 90% of their taxable income as dividends, they often deliver attractive yields compared to other income-generating investments, such as bonds or savings accounts.
This makes REITs particularly suitable for retirees or individuals looking for a regular passive income stream.
New investors looking for diversification
For those new to investing, REITs provide an easy way to diversify into the real estate sector without needing substantial capital.
Unlike directly owning property, which requires large upfront costs, you can start investing in REITs with as little as a few hundred dollars.
REITs allow new investors to gain exposure to a wide range of properties – such as retail malls, office spaces, and healthcare facilities – without the hassles of property management.
This diversification helps spread risk and reduce exposure to the volatility of any single asset class.
Investors seeking low-capital property exposure
Singapore’s property market can be prohibitively expensive for many individual investors, with rising home prices and significant upfront costs.
REITs offer a low-cost alternative to direct property ownership, allowing you to participate in the real estate market with much less capital.
You can enjoy the benefits of property investment, such as rental income and capital appreciation, without the large financial commitment and responsibilities of maintaining physical properties.
Long-term growth-oriented investors
While REITs are known for their income potential, many also offer the possibility of capital appreciation over time.
This is particularly so if they invest in high-quality properties in prime locations or sectors with strong growth prospects, such as data centres or logistics facilities.
As property values rise and rental income increases, long-term investors can enjoy dividends and growth in their investments.
Frequently Asked Questions
What are your rights as a REIT unit holder?
As a REIT unit holder, you have several rights, including the ability to receive dividends from the REIT’s rental income, vote on important matters at general meetings, and access financial reports about the REIT’s performance.
You also have the right to buy and sell units on the stock exchange, providing liquidity similar to stocks.
How do you get returns from investing in REITs?
You get returns from investing in REITs through regular dividend payouts and potential capital appreciation.
Dividends come from the rental income generated by the REIT’s properties, while capital gains are earned if the REIT’s unit price increases over time.
Conclusion
Investing in REITs is a great way to gain exposure to the real estate market without the hassle of managing physical properties.
We’ve covered what REITs are, how they work, and the different types available in Singapore – like retail, office, industrial, and hospitality REITs.
We also discussed key factors to consider when selecting the best REITs, from evaluating metrics like NAV and WALE to understanding risks like market volatility and interest rate changes.
If you’re looking for stable income, diversification, and long-term growth potential, REITs are certainly worth considering.
But we get it – investing can be overwhelming, especially with so many options.
If you’re feeling unsure about where to start, don’t worry.
You can talk to one of our trusted financial advisor partners for free.
They can help you figure out which REITs might be the best fit for your financial goals.
Whether you’re new to investing or looking to expand your portfolio, we’re here to make the journey easier for you!
