Hi Investors,
REITs are among the extremely popular investment choice for Singaporeans because
- Of exposure to property and as well as offering good returns
- You can enjoy tax transparency if they pay out at least 90% of their profits as dividends
- They can be bought or sold on the Singapore Exchange(SGX) like a stock
- As investors you can choose to analyze individual REITs or invest in a basket of REITs using an ETF
(A) WHAT IS A REIT (REAL ESTATE INVESTMENT TRUST)
REIT – it is a company (listed as a Unit Trust) that owns and operates properties and receive rental income from its tenants. As a unit holder, you are actually buying a share in the underlying property of the REIT. REIT units could be traded in the stock market like any other stocks making it easier for investors to easily buy or sell units. This makes it a more liquid investment compared to physical property.
The investor benefit through regular dividend payments and can also enjoy share price appreciation similar to any stock. Most REITs yield around 5% to 9%.
Now let us look at different types of REITs.
(Note: different countries could have more on what is listed here, to make thing simple we look at the Singapore REITs market).
(B) TYPES OF REITs (SIMPLIFIED VERSION)
RETAIL – shopping mall as their underlying assets
- Easier to research as you simply visit the malls and observe how well the businesses are doing in terms of location, the tenant mix, the types of shoppers, and any kind of AEI (*Asset Enhancement Initiatives: see glossary below) signaling that the management continues to upgrade the establishment.
- As a starting REITs investor, you can focus on analyzing this particular REIT. *Scuttlebutt your way in if I may say.
- Examples: Capitalmall Trust, Fraser Centrepoint Trust
HOSPITALITY – hotels as their underlying assets
- Maybe considered the riskiest, because it is susceptible to a lot of variables from unpredictable ravages such as earthquakes, terrorist attacks, disease pandemic to name a few. It may be wise to consider and factor in all these additional risk before investing.
- Economically sensitive and sudden fluctuations in visitor arrivals may impact hotel profitability.
- Examples: Ascendas Hospitality Trust, Ascott Residence Trust
OFFICE – office space as their underlying assets
- A.ka. commercial REITs
- Strongly link to the economy because when the economy is doing very well, business tend to rent more office space. Watch out for office vacancy.
- Examples: MappleTree Commercial Trust, Capitaland Commercial Trust
HEALTHCARE – hospitals and nursing homes as their underlying assets
- Favored by Risk adverse investors due to its defensive nature
- Because of its risk adverse characteristics it is expensive and generate low yields
- Examples: First REIT, Parkway REIT
INDUSTRIAL – factories, warehouses, business parks and industrial buildings as their main asset
- Usually with higher yields because of low maintenance cost but despite this kind of attractiveness it is difficult to conduct due diligence as the investor has no direct access to the factories or the properties unlike retail REITs
- Quite popular due to high yields. A word of caution: Yield alone is not the sole yardstick in measuring a REIT’s profitability.
Examples: Ascendas Real Estate, ESR-REIT
Cross Border – owns overseas assets
Examples: Capitaland Retail China Trust, IREIT Global, Lippo Malls Retail Trust
- Now that we know a thing or two about REITs, let’s look at some guidelines
(C) HOW DO WE SEARCH FOR THAT REIT?
STICK TO WHAT YOU KNOW OR EXPAND YOUR KNOWLEDGE (GAIN INSIGHT TO YOUR CHOICE OF REIT)
“What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. ” – Warren Buffett
As an investor you need to understand what ticks or befalls the type of REIT you are interested at. Example in Retail REITs, location is VERY, (let me put an emphasis on that) VERY important whereas in industrial REITS this doesn’t really matter.
Another example, rentals on retail REITs are easier to increase compared to Industrial REITs because tenants for Retail REITs can’t simply move from venue to venue. Think about it, tenants can’t simply move to another location for they have to consider renovations, customers who are used to their locations and shopping traffic. Whereas for Industrial REITs, no particular renovation is required hence they have low maintenance cost, competitive and simply can’t increase rental income.
You gain insight by talking to experience investors, reading books (I have listed some books below), articles, and attending seminars.
Some questions we could also ask follows:
- Is the properties maintained properly?
- Is there any kind of AEI taken by the management?
- Are the malls easily accessible?
Developing a sense of insight to different types of REIT serves as a good advantage to the investor.
(D) CONSISTENT AND PREDICTABLE (NUMBERS AND VALUATION PART)
“Buy companies with strong histories of profitability and with a dominant business franchise.” – Warren Buffett
What we want are REITS that have consistent and predictable earnings for they are the ones that are likely to pay dividends. I have listed some of the basic fundamental metrics you should look at:
⇔NPI (Net Property Income) – metric that is used to determine a property portfolio’s profitability and financial health, after deducting operating and recurring
What to Look out for : Consistent / positive
⇔DPU (Dividends or Distribution per share) – the cash REITs use to pay investors from earnings of their rental income. You want a company that is able to sustain or grow its
What to look out for : Consistent / Positive
⇔GEARING RATIO – ratio of debt to the value of the property, this serves a protection for investors from REITs that generate returns from heavy use of debt
What to look out for : 35% BELOW & Doesn’t fluctuate too much.
⇔NAV (NET ASSET VALUE) – simply means that if a REIT has to sell off all of its properties and other assets, it will use part of the money to pay off all of its liabilities. The remaining balance is what the unitholders would get. NAV is good to know but a much better way is using PB ratio. (See below)
⇔PB (PRICE TO BOOK) RATIO – NAV alone doesn’t tell you a thing. To know whether the valuation is considered cheap, we have to weigh it against the market.
What to look out for : PB OF LESS THAN 1
- Numbers that are consistent, positive and ideally trading below its book value (PB RATIO)
- Shareholder friendly management
The above numbers form the basic checklist in analyzing REITS. For those who are interested in learning more about REITs, there are more advanced metrics that are available for further reading (see recommended books below)
For those who are still interested in REITs but doesn’t have the time to analyze you can opt for REIT ETF.
(E) WHAT IS AN ETF?
ETF (Exchange traded Fund) – An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors. (from Investopedia)
It means that instead of buying the individuals eggs in a basket, you hold or buy the basket itself.
By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.Warren Buffett (Berkshire Hathaway Shareholder Letter, 1993)
As of this writing there are three available, investable and affordable ETF for REITS.
- Lion-Phillip S-REIT ETF
- NikkoAM-Straits Trading Asia Ex Japan REIT ETF
- Phillip SGX APAC Dividend Leaders REIT ETF
For a more detailed breakdown you can visit this website https://www.sias.org.sg/files/SGXMarketUpdates/24112017-SGX-Three-REITs-ETFs-in-Focus.html
For the savvy investor looking for more than the basic I suggest reading the following books:
- BUILDING WEALTH THROUGH REITs by BOBBY JAYARAMAN
- INVESTING IN REITS 4TH EDITION by RALPH BLOCK
- THE INTELLIGENT REIT INVESTOR by BRAD THOMAS
(F) GLOSSARY
- AEI (ASSET ENHANCEMENT INITIATIVES) – is a strategy to enhance the functional and aesthetics characteristics of a property, such that it has greater potential to yield more income for the REIT, including via positive rental reversion.
- SCUTTLEBUTT – a method of learning by talking to people who are directly or indirectly related to the company. E.g. workers, management personnel, and competitors thus educating oneself thoroughly before making an investment.
(G) SOURCES
https://www.investopedia.com/terms/e/etf.asp#ixzz5D7LqXGnV https://www.reitsweek.com/2017/11/asset-enhancement-initiative.html
To your dreams,
Mind Kinesis Research Team
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