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Singapore's REITs – high-risk investment or safe haven?

By Istvan Loh

With the real estate market in a downturn, can REITs be far behind? After all, residential prices have been in a free-fall for over two years. They declined by 4% in 2014 and then again slipped another 3.7% in 2015.

Market analysts say that values could tumble a further 8% this year.

Industrial property prices have fared no better. With the downturn in the manufacturing sector, values fell by 4.8% last year. In the first quarter of this year, industrial property prices have lost 2.5% of their value compared to Q4 2015.

In fact, the entire real estate sector, barring a few exceptions, is going through a rough patch. In these circumstances, it may be best to stay away from investing in property till the market bottoms out.

But investors may want to consider putting their money in Real Estate Investment Trusts (REITs) instead.

With a little careful planning and research, it is possible to make a tidy profit from the lucrative business of property ownership without carrying some of its attendant risks.

Singapore REITs – A REIT is essentially a trust formed with the specific purpose of raising capital to purchase real estate assets. The rental income from these properties is then distributed to unitholders.

Singapore's REITs or S-REITs are closely regulated and monitored by the Monetary Authority of Singapore (MAS).

One of the most important rules that an S-REIT follows is that it has to distribute 90% of its taxable income to unitholders. In addition to this, unitholders are entitled to the capital appreciation in the properties that have been purchased by the REITs.

Since being established in 2002, the S-REIT market has grown tremendously. It is now at a stage where it compares favourably with other REIT markets in the region.

Currently, with a market capitalisation of US$48 billion, the S-REIT market is about half the size of the Japanese and Australian markets and double Hong Kong's REIT market.

Performance of S-REITs – The Singapore Exchange maintains the SGX S-REIT 20 Index. Its 20 constituents have a combined market capitalisation of $52 billion.

According to information issued by the Singapore Exchange, the SGX S-REIT 20 generated a total return of 2% in the month-to-date (data as of 22 March 2016). This compares favourably with the Bloomberg Asia REIT Index, which gained 0.5% in SGD basis over the same period.

The index has maintained a dividend yield of 6.3% compared to the Bloomberg Index yield of 4.5%.

As compared to the SGX S-REIT 20 Index yield of 6.3%, several individual S-REITs had better performance. Cache Logistics Trust, which has a market cap of $0.8 billion and is an industrial REIT, had a yield of 10.3%.

OUE Hospitality Trust, which concentrates on the hotels and resorts sector, and has a market cap of $1.2 billion, had a yield of 9.7%.

High-performance S-REITs – The largest S-REIT, CapitaLand Mall Trust, which has a market cap of $7.7 billion, yielded 5.4%.

In its results for the quarter ended 31 March 2016, CapitaLand Mall Trust reported substantial growth. Gross revenues of $179.8 million compared favourably with $167.35 million achieved a year ago. Distributable income to unitholders jumped from $92.86 million a year ago to $96.75 million.

Mapletree Industrial Trust has been turning out a stellar performance. It has generated a total return of 42% over the last three years. It has done well for its unitholders since its IPO in 2010.

One of its major strengths is that its portfolio is well diversified with investments in properties in the wholesale, retail, manufacturing, and trade sector.

Mapletree Commercial Trust is another S-REIT with an impressive performance. With a three-year return of 23.7% and a dividend yield of 5.7%, it has bettered the performance of many of its competitors.

But not every S-REIT has turned out good results. A quick glance at SGX data will make that very apparent.

While it is definitely possible to identify high-yielding S-REITs, a solution for retail investors who do not have the time or inclination to make a deep study of the performance of each S-REIT is in the offing.

SGX to launch ETF for S-REITs – According to a report in the Financial Times, SGX is considering the launch of an exchange-traded fund (ETF) for S-REITs soon.

Sonny Tan, chief executive of REITAS, a trade body that promotes the S-REIT industry, says, "REITs can be an effective investment alternative for Singaporeans to participate in the investment property market given its regular and attractive dividend payout, low investment threshold, and flexibility of entry and exit as a listed share."

The launch of an S-REIT ETF will help to broaden the market and make this investment opportunity available to a larger number of retail investors.

More importantly, they will not be subject to the performance of individual S-REITs, but will be able to benefit from the performance of the entire pool of trusts in the ETF.

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