Is the REIT party over?
Many investors are asking this question after the recent surge in REIT unit prices.
While falling interest rates have provided a short-term boost, is this enough to justify the current valuations?
If you base your REIT purchase on short-term interest rate projections alone, you may be setting yourself up for future disappointment.
Should your predictions fall flat, you will lack the conviction to hold, and end up selling at the wrong time.
We think you can do better.
Better reasons to own REITs
In our view, the conviction to hold REITs has to start with long-term reasons.
You could ask Smart Investor co-founder David Kuo why he likes REITs.
His answer will be: Why not?
Who wouldn’t want to add a degree of income-generating stability into a well-balanced portfolio?
REITs provide you with access to valuable properties that can produce recurring rental income.
If we choose well, we stand to gain from income and some capital appreciation as well, if property prices should rise.
Land, after all, is a finite resource. There is only so much land available for development.
Without further ado, let us count the reasons why REITs stocks are a great place for an investor to invest.
Reason #1: Keeping the taxman at bay
There are not that many ways to make money without the taxman wanting his cut.
For example, when companies make a profit, they must pay corporate tax.
But REITs don’t have to pay taxes — that is, provided they pay out at least 90% of their net profit to shareholders as distributions.
In addition, REIT unitholders investors don’t pay income tax on dividends in Singapore.
On this count, REIT investors win on two separate fronts, the businesses that we invest in don’t have to pay corporate tax, and we don’t have to pay income tax on the share of the profits that is distributed, either.
That is a great reason to use REITs as the foundation of your portfolio.
Reason #2: Fancy owning a mall?
REITs open up the possibility of owning properties that are out of reach to the common investor.
These would include properties in the industrial, commercial, retail (think shopping malls), and data centres.
Examples include CapitaLand Integrated Commercial Trust (SGX: C38U) which owns both shopping malls and commercial office buildings, and Mapletree Industrial Trust (SGX: ME8U), home to data centres and industrial buildings.
There are also healthcare REITs which enable us to own hospitals and nursing homes.
For instance, Parkway Life REIT (SGX: C2PU) is one of Asia’s largest listed healthcare REITs by asset size. The REIT’s portfolio includes three major private hospitals in Singapore, namely Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital.
The REIT also hosts 59 nursing homes and care facilities in Japan.
What’s more, some of these properties are located outside of Singapore, making it easy for us to diversify beyond Singapore’s shores.
Reason #3: Long-term growth, not short term boosts
The REIT sector can sometimes be perceived as slow-moving and boring.
But there is nothing boring about the returns that REITs can offer.
According to a 2024 second quarter (2Q’24) SGX report, the market capitalisation of Singapore REITs and property trusts delivered a compounded average growth rate of 6% over the past 10 years.
And that’s despite the high interest rate environment which has dragged REIT prices down since 2022.
That’s hardly boring, by any measure.
Get Smart: Common reasons, uncommon results
Investing should be kept simple.
Too many times, some investors take simple ideas and make them complicated and in the process, twist themselves into a pretzel.
You don’t have to do that.
It can be easy to get caught up in complex strategies and market predictions.
We’re here to keep you grounded.
By focusing on the long-term fundamentals and avoiding short-term speculation, you can build a robust and sustainable investment portfolio that allows you to sleep well at night.
Want more dividends in 2024? Our latest FREE report spotlights five Singapore REITs with distribution yields of 5.5% or more, a rare find in today’s market. These are reliable, proven performers. Just one stock inside could boost your portfolio’s returns in the next few months. Download your report today and start reaping the benefits.
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Disclosure: Chin Hui Leong owns shares of CapitaLand Integrated Commercial Trust, Mapletree Industrial Trust and Parkway Life REIT.
