Real estate investment trusts, or REITs, have grown in size and prominence since the first REIT listed on our shores back in 2002.
The sector started with just two REITs back in 2002 – Ascendas REIT (SGX: A17U) and CapitaLand Mall Trust (SGX: C38U), or CMT.
Over time, the REITs sector has grown by leaps and bounds.
At the end of 2019, REITs, together with stapled and property trusts, contributed 24% to day-to-day turnover in the Singapore market and comprised 12% of Singapore’s stock market capitalisation.
There were 43 listed REITs and property trusts at end-2019.
If we add the two that were listed in 2020, Elite Commercial REIT (SGX: MXNU) and United Hampshire US REIT (SGX: ODBU), this means there are now 45 REITs on the local bourse.
Investors now have a wide selection of REITs to choose from, ranging from hospitality and commercial REITs to niche ones such as a data centre REIT and outlet mall REIT.
This wide array of REITs also offers the choice of investing in either local properties or overseas ones.
REITs have now become an important pillar of our stock market, and Singapore has also gained renown as a choice venue for the listing of REITs.
Here are three key reasons why you should include REITs in your investment portfolio.
REITs own a portfolio of properties that are rented out to tenants.
The rental income flowing from these tenants is underpinned by long-term contracts ranging from two to three years (e.g. retail) to five or more years (e.g. data centres).
Furthermore, REITs must pay out at least 90% of their taxable income to enjoy tax benefits.
These two attributes, therefore, make REITs a perfect vehicle for steady, dependable dividends.
The rental contracts lock in tenants and ensure cash flow visibility for the REIT, while the requirement to pay out at least 90% of its profits means that unitholders receive a regular distribution.
What’s more, distributions from REITs are tax-free in the hands of the unitholder.
Owning REITs in your portfolio means you get to enjoy a steady stream of passive income that goes directly into your bank account.
Resilience during downturns
REITs as an asset class have proven to be resilient during times of economic stress or crises.
To be fair, this attribute applies to the stronger, well-managed REITs with reputable sponsors.
During the Great Recession back in 2008-2009, the majority of REITs survived and continued to pay out distributions, though a few had to undertake rights issues to shore up their balance sheet.
In the current COVID-19 pandemic, REITs are also not in any danger of collapsing, as their portfolios are supported by physical real estate that continues to hold value.
Several REITs have, however, slashed their distribution per unit (DPU) to conserve cash to tide through the crisis. This cash is also being channelled to assist tenants who are in dire straits through tenant support measures.
The Monetary Authority of Singapore (MAS) has implemented measures to ease the financial strain on REITs, such as deferring the requirement to pay out 90% of their income till 2021 and raising the leverage limit for REITs from the current 45% to 50%.
Ultimately, I am confident that REITs will survive, though they end up slightly battered.
In contrast, companies that are located in industries that are hardest hit by the pandemic, such as airlines, hotels and tourism, are in real danger of going bust.
A combination of growth and income
Finally, REITs can offer a sweet mix of both growth and income.
How so, you may ask?
If a REIT has to pay out 90% or more of its net profit, this action will not leave it with much cash for growth.
The beauty of REITs is that they can make use of debt and other methods to grow, and need not rely solely on internally-generated cash flow.
There are a few ways a REIT can grow over time.
One is through acquisitions of assets that boast a higher dividend yield than the REIT’s existing yield.
These acquisitions, known as “yield-accretive” ones, help to boost the DPU for unitholders.
Keppel DC REIT (SGX: AJBU), a data centre focused REIT, has grown its portfolio in this way.
Its assets under management have risen from S$1 billion since its IPO in December 2014 to S$2.8 billion as of 30 June 2020.
Another common method used is for REITs to undertake asset enhancement initiatives or AEI.
Such AEI boosts the value of existing assets by upgrading them or rejuvenating them, thus increasing their market value and boosting their rental prospects.
To some investors, it can be a daunting task to invest in stocks during a full-blown pandemic.
Yet, there are some REITs that are in an enviable position to take full advantage of the current climate.
To help you navigate the REITs landscape in Singapore, The Smart Investor has launched a brand-new Special FREE report: “How You Can Make Money Investing In REITs During This Pandemic”!
We cover the pandemic’s impact on REITs in Singapore, and dive into the different sectors of Hospitality REITs, Retail REITs, Commercial REITs, Industrial REITs, Healthcare REITs.
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Disclaimer: Royston Yang owns shares in Keppel DC REIT.