Singapore REITs 101 Guide: How to start investing in REITs (2024)

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.

Pros and Cons: REITs vs Physical Properties

#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.

#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.

#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:

1. A diversified group of clients
2. 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)

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.

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.

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:

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.

HighWALEimplies 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.

LowWALE, 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.

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

Asset Enhancement Initiative (AEI)

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:

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.

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.

An example of a screen result looked like this:

• 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.

If you are an aspiring investor looking to own a piece of Singapore real estate trust with low starting capital, while earning a regular income, we hope this complete guide to Singapore REITs has convinced you to start looking at REITs as an option.

We have provided the key fundamentals to REITs investing in Singapore via the various sections above. You should be able to understand frequently used terms in REITs, understand what to look out for in a profitable REIT, and how to actually invest and buy a REIT.

Our Early Retirement Masterclass trainer, Christopher Ng Wai Chung has had frequent discourse with us on the power of REITs as a dividend investing tool. His results back up his actions. He retired at 39 with a passive income of $6,000 - $8,000/month. And his retirement was never threatened by the birth of his second child or his desire to go to law school at SMU.

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