Real estate investment trusts (REITs) are a great way for investors to diversify their portfolio.
There are more than 40 REITs and stapled trusts listed on our local bourse, providing income-seeking investors with a vast array of investment options.
Some REITs have a portfolio of properties that are not located in Singapore, offering local investors the chance to diversify overseas.
However, as with any investment, REITs with overseas portfolios do come with their own set of risks.
Here are some of the advantages and disadvantages that come with investing in REITs with overseas portfolios.
Investing in REITs with overseas portfolios offer investors many potential benefits.
Besides providing investors with the ability to diversify their portfolio to include exposure to overseas real estate, these REITs also generally provide higher dividend yields.
For instance, three high-yielding REITs at the moment are Dasin Retail Trust (SGX: CEDU), EC World Real Estate Investment Trust (SGX: BWCU) and Manulife US REIT (SGX: BTOU).
They have distribution yields of around 10.5%, 7.2% and 7.2% respectively.
Dasin Retail Trust and EC World REIT are China-focused REITs with portfolios solely in China, while Manulife US REIT primarily invests in office properties in the US.
REITs with portfolios concentrated overseas also often trade at lower price-to-book valuations than REITs focused on Singapore-based portfolios, making them cheaper as a whole.
There are a few possible reasons why REITs with overseas portfolios may trade at significant discounts to their Singapore-based peers.
Firstly, investors might not be willing to invest in REITs with properties that they are unfamiliar with, or unable to see for themselves.
Secondly, REITs with international exposure carry currency risk.
If the local currency that the REIT collects its rental in devalues against the Singapore dollar, its distributable income and distribution per unit (DPU) may be affected.
The Indian rupee, Australian dollar and Indonesian rupiah have all devalued significantly against the Singapore dollar in recent years.
Thirdly, Singapore generally has a lower interest rate than many other countries.
As such, REITs that invest in Singapore properties enjoy lower interest rates on their debt.
On the contrary, REITs with international exposure often have higher interest rates and lower interest cover ratios.
As REITs are investment vehicles that rely heavily on debt financing, this factor alone could impact the REIT’s cash flows and, consequently, its ability to pay out a stable DPU.
Country-specific regulations may also affect the ability of the REITs to pay out distributions to its unitholders.
In countries such as the US for instance, there are tax laws governing withholding tax on the transfer of monies outside the country.
REITs that invest in the US need to ensure they do not run afoul of such regulations or they may suffer penalties as a result.
Get Smart: Weighing the pros and cons
Investors in Singapore are blessed with a multitude of REIT options to choose from.
REITs with overseas exposure offer investors a unique opportunity to invest in real estate outside of our country and often also boast higher yields than their Singapore-based peers.
However, at the same time, numerous risks could impact such a REIT’s distribution to unitholders.
When investing in REITs with overseas exposure, investors should carefully evaluate each of these risks and ensure that the risk-reward profile suits their investment objective.
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Disclaimer: Royston Yang does not own any of the companies mentioned.