Real Estate Investment Trusts (REITs) are getting more popular as an investment tool in recent years for retail investors because of the growing investment-savvy population along with the general love that Singaporeans have when it comes to property investing.
As some of you may already know, REITs pay out a good majority of their profits as dividends. Here are five other things every investor should understand and look out for about REITs before investing in them.
1. It Is Not Exactly Like Buying Real Estate
When you invest in REITs, you become a shareholder of the REITs that you invest in, and by default, the properties the REITs own. There are good and bad points to this.
The good thing is that unlikely individual property which you own, you do not have to worry about leasing out the properties, finding the right people to lease it to, maintaining your property and ensuring that your tenants pay up on time…the list goes on.
Being a shareholder frees you from these burdens. However, be mindful that when investing in REITs, retail investors like you and I will only ever own a tiny percentage of the REIT and will likely have no say in the decisions (major or minor) that will be made. These include whether to buy or sell more properties, taking a bigger loan or deciding on whether the REIT should be doing a fund-raising.
2. REITs Are Traded On The Stock Exchange
Again, there are two sides to the coin of being traded on the stock market. One big advantage is the liquidity it provides – it means that if you wake up one morning and suddenly do not like where the REITs you own is heading, you can immediately sell your ownership on the stock exchange. This is unlike owning individual properties, where the process of offloading an asset could take several months and would require the assistance of real estate agents.
When you invest in REITs, you do not need to pay any duty to the government. The only cost you have to bear would be the brokerage charges you incur.
However, being traded on the stock market gives rise to volatility. Sometimes, when the general stock market is doing badly, REITs may follow suit and perform poorly even when the property market is largely unaffected and the REITs remain strong. Prices are also open to the day-to-day volatility of the stock market.
Another thing to consider is that not all REITs are traded on the stock market. For most retail investors, it is best if they avoid pursuing these REITs unles they are very familiar with them. Most of these REITs lack the advantages discussed in this article as well as pose additional risks and opacity, especially to non-savvy investors.
There is also a REIT fund offered by Philip Unit Trusts – Philip Singapore Real Estate Income Fund. This is basically a fund of REITs. It offers better diversification but charges a management and Trustee fee that comes up to about 0.9%. There are benefits such as not worrying about individual REITs and share issues or dividend reinvestment plans, but investors must determine if this is worth losing almost 1% of dividends for the benefits it delivers.
Investing into REITs offer you a way to reduce your risks through diversification. Instead of owning one property of your own, your REITs would often own multiple buildings with tenants from various businesses in Singapore.
Majority of the properties own by Singapore REITs are currently close to, but not, 100% occupied – this means that there are units that are not rented out. If people were to own units individually, some people would likewise not be able to rent out their units.
4. Proper Management
For properties to give you the best returns, they need to be properly managed.
To relay this point, let’s imagine Plaza Singapura, a mall we consider pretty well established and frequented by many people, is owned by individuals. This means that for everyone to get a return, every unit in the mall must be rented out.
In most cases, you would consider it a successful mall if all the units were rented out during the year, save for one. However, if an individual owned that one unit, he would most likely incur extremely high costs of holding the property, since he is not able to rent out his unit.
This may cause him to lower his rental rate and start a price war. Something that REITs would try to avoid.
Also, REITs are able to take advantage of free space more meaningfully to hold exhibitions or galleries, thus earning better returns. They also work hard behind the scenes to bring in more foot traffic to the malls, and ensure that it is kept relevant. These are things that would be neglected if individuals owned single units in a building.
In addition, REITs managers have to comply with the Monetary Authority of Singapore’s (MAS) policies. These policies ensure REITs are properly managed by only taking on sustainable level of debt and development. It has several regulations imposed on it including its maximum borrowings (35% to 45% of its total asset value depending on whether it is rated by the top three credit rating agencies). It cannot spend more than 25% of its total asset value on new developments. These measures make REITs relatively safer for investors.
5. Stable Tax-free Income
REITs on the local exchange offer high yields and are relatively safe because they represent actual tangible buildings in Singapore and to a lesser extent, some overseas properties. To-date, REITs in Singapore averaged a return of about 6% yield annually.
This is particularly relevant to investors looking for regular income distributions from stable assets. Even for most stable and safe businesses, profits have to be retained in the company to accommodate for future growth plans and capital expenditures. In contrast REITs have to distribute 90% of their profits and in regular intervals (half-yearly or quarterly).
The best part about receiving dividends in Singapore is that it is tax-free. This is a far cry from owning an actual property, where you have to fork out property tax and income tax for properties that you own and rent. So this is another advantage that REITs provide.
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