The REIT way to fight Singapore's low interest rates

In Singapore and across the world, interest rates are at all-time lows.

Government bond yields have been plunging lower around the globe and central banks pumping cash into their economies to keep them going. Plus, they have been buying trillions of dollars’ worth of their own bonds.

This has resulted in historically low interest rates. Countries such as Denmark, Sweden, Switzerland, and Japan already have negative-yielding bonds. In total, around US$13 trillion worth of government bonds are trading at negative yields.

This means investors who buy them are guaranteed to lose money if they hold them to maturity. Effectively, the bond market is broken.

Singapore's bonds aren't doing much better
In Singapore, the central bank doesn’t set interest rates. Instead, the country’s exchange rate is used as the main monetary policy tool – it’s called the exchange rate policy band. Singapore is unusual in this respect compared to other developed nations.

For example, in anticipation of slower than expected economic growth, the Monetary Authority of Singapore (MAS) might allow the country’s dollar to drop in value versus other currencies. The hope is that a cheaper dollar would help increase trade and boost the economy. In this sense, it has a similar effect that cutting interest rates has in other countries.

Despite the MAS not touching interest rates in recent months though, Singapore bond yields have also fallen to their lowest levels ever. Right now a 10-year sovereign bond yields about 1.7%.

The figure below shows how Singapore’s interest rates compare with those of other major economies.

Bond yields are so low that if Singapore wasn’t facing deflation (with prices falling for 20 consecutive months), you’d actually lose money owning a 10-year sovereign bond. That’s because if inflation was, say, 2% and a 10-year bond is only paying you 1.7%, your “real” return after inflation would be negative 0.3%.

As a result, investors looking for yield and income need another option. And real estate, via real estate investment trusts (REITs), might be it.

The REIT way
REITs are companies that own and operate a portfolio of diverse properties – anything from hotels to shopping malls to apartment buildings. REITs are listed on the stock exchange like a regular stock. And you buy and sell a REIT like a regular stock (and pay the same commissions).

But REITs give you exposure to a professionally managed group of properties. And they currently have very attractive yields.

Singapore REITs are regulated by the MAS, which dictates how much of the rental income earned should be paid back to investors in the form of dividends.

This is why investors get a regular yield from their REITs that is sourced directly from the rents paid on the properties. The table below shows REIT yields in Singapore compared with some other developed countries, and with 10-year government bond yields.

Based on the FTSE Straits Times REIT Index, the average REIT yield in Singapore is 5.9%. That’s over 4 percentage points higher than what 10-year bonds pay. It’s one of the highest spreads in Asia at the moment.

Of course, higher yields reflect higher risk. REIT share prices can be volatile and you can lose money on them if real estate prices struggle. Plus, the REIT could decide to cut the dividend if rental prices fall.

They are definitely riskier than government bonds. But you get compensated for the risk via the higher payout.

According to commercial real estate giant Colliers International, investors in Asia are increasingly looking to real estate to boost the yields they lost in the bond market. Their study also suggested that Brexit and other recent global economic uncertainty have had a positive effect on the REIT market in Asia.

As global investors flee to safer assets, like government bonds, bond yields are likely to stay lower for longer. This makes it cheaper to borrow for real estate investments – which in turn should sustain real estate prices and support REIT share prices.

Singapore REITs
There are a number of REITs in Singapore, and there are now 20 REITs with a market capitalisation greater than S$1 billion. The largest REIT is CapitaLand Mall Trust, which offers a yield of over 5%.

There is unfortunately no REIT ETF available for the Singapore market. There are, however, two indexes that track the market – the FTSE Straits Times REIT Index and the Singapore Stock Exchange (SGX) REIT index.

The SGX index tracks close to 34 REITs in Singapore. These include everything from shopping malls to office complexes. Here is a full list of all the REITs listed on the Singapore exchange. You will need to do your own research before buying any REITs.

Investing in REITs is another way to diversify your portfolio and your income stream. In a low-yield world, they are a good option for investors who can tolerate the risk.

Sign up below to receive the Truewealth Asian Investment Daily, a free e-letter that brings you independent insight on investing in Asia that will save you time and make you money...