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According to CBRE, Singaporean investors are the biggest overseas commercial real estate investors in Asia. In 2021, a total of US$32 billion was deployed by investors in Singapore, marking a 164% rebound from 2020, and which was also higher than the pre-pandemic peaks.
Another notable piece of information from the CBRE report was that the United States (US) was the preferred foreign property investment destination among investors in Singapore and Asia as a whole.
This is not entirely surprising as investing in US properties gives us access to the biggest and most vibrant economy in the world. In addition, the US economy is expected to deliver stable growth – 3.0% in 2022 and 2.2% in 2023 – despite macroeconomic uncertainties persisting.
As 90% of us in Singapore already own the home we are living – giving us a high level of local property exposure, investing in overseas property allows us to build a more diversified portfolio of assets. Being highly developed, US-based properties are also in-demand and well-utilised, and transactions relatively transparent.
How Singapore Investors Can Buy US Properties
We can choose to buy the traditional way – searching for a high-quality property that we will be able to rent out – or consider investing REITs that are listed on the stock exchange. There will be pros and cons when deciding to invest in either way.
If we want to buy a physical property, we need to realise that our best bet is to consider the long-term prospects for rental and capital appreciation of a property. Another barrier is the relatively hefty property downpayment we have to make. The hope is that our rental income would be able to offset the monthly mortgage repayment. After a number of years, we would have paid up for the property, and be able to live off the rental income.
Alternatively, we can invest in REITs that own properties in the US. They would already have a track record of the performance of their properties and the expected distributions that investors can receive annually. Another main benefit is also that we can avoid a big upfront capital outlay, and instead simply start investing from a few hundred dollars.
As the most developed REIT market, there are many US-focused REITs that we can invest in. On the New York Stock Exchange (NYSE), there are over 150 REITs that we can invest in. As Singapore is the largest REIT and property trust market in Asia (ex-Japan), we can also invest in as many as 44 S-REITs on the SGX, many with exposure to US properties. Of these, there are 6 US-pure-play REITs, including United Hampshire US REIT, which owns a portfolio of 24 properties across the east coast of the US.
In this article, we look at some factors that we, as retail investors and not large institutional investors, need to consider when investing in physical US properties or REITs.
#1 Access To The US Property Market
As small retail investors, we will not have the same access to physical properties in the US market compared to larger players. While we can do desktop research, many of us do not possess the ability to travel to the US often enough to collect on-the-ground information.
This means we would not have the same relationships with property agents in the US to access great deals. On the contrary, we should actually be more careful about being sold lemons in the US property market. When investing on our own, we can realistically only buy a very small number of properties.
When investing in REITs, we have access to a ready-made and diversified portfolio. For example, on United Hampshire US REIT’s website, we can see that all of its 24 properties, worth close to US$700 million, are based in eight states within the populous east coast region of US.
Source: All screenshots taken from United Hampshire US REIT website
We can also delve further into each of the properties it owns:
- Massachusetts (2)
- New York (7)
- New Jersey (8)
- Pennsylvania (1)
- Maryland (2)
- Virginia (1)
- North Carolina (1)
- Florida (2)
REIT investors, and even the general public, would have access to all these information. Furthermore, REITs will also make available on their website, and on the SGX Net portal, regular investor briefing presentations. These will typically provide insights and statistics for REIT investors.
For example, in a recent investor presentation, United Hampshire REIT’s highlighted that foot traffic to its grocery and necessity-focused properties remained relatively positive throughout 2021 (chart on the left below) and also how their tenants adapted their physical stores to be part of their omnichannel (online and offline) strategy. This underlines the resilience of its properties despite the COVID-19 pandemic.
The second chart (on the right) depicted e-commerce and brick-and-mortar stores sales growth – both of which remained healthy.
This is just one slide in its whole presentation. More information like this can be found in the rest of its material, giving us a clearer picture of the properties they own and the landscape they are operating in.
As listed entities, many REITs will also have coverage in the public domain – either from research done by the regulator or the various stock brokerages in Singapore. For example, SGX’s monthly Chartbook: REITs and Business Trust also provides information on REITs listed in Singapore.
Certain brokerages also write analyst reports on REITs in their coverage. UOB Kay Hian recently issued the report United Hampshire US REIT – Providing Certainty in Uncertain Times on 25 March 2022, issuing a “Buy” call with a target price of US$0.97 (54% higher than its US$0.63 share price today).
Finally, to buy units in REITs, we simply need access to a brokerage firm. Since United Hampshire US REIT is listed on the SGX, we can simply buy it from any of the local brokerages. We also need to pay a relatively small brokerage fee of around 0.28% (or less) for each trade that we make.
If we want to buy units in a US-listed REIT, we need a brokerage that gives us access to the US market. One thing to note here is that we can store our SGX-listed investments with our CDP account, while our foreign investments will be stored in a custodian account, which may incur fees.
#2 Financing Your US Property Investment
We have to pay a substantial downpayment when purchasing a property in the US (or elsewhere). As most of us would only have Singapore Dollars (SGD), the first thing that comes to mind is how to transfer our SGD to the US? Very quickly, the next question will be how do we get the best possible currency exchange rate for our transfer?
If we choose a suboptimal way to transfer our funds, we will incur costly fees and poorer exchange rate. Given the amount of money involved in a property transaction, this can translate to a big amount.
Very few of us would have a large amount of money lying around to pay off a property investment in full. Being able to take a loan for the remaining property price allows us to own a valuable asset for the fraction of its price – usually around 25% for buyers who are non-US residents. Thus, we also need a home loan from a bank. Not having a financial track record in the US, we may find it harder or have to pay a higher interest rate to secure a home loan in the US.
Finally, we have to repay our mortgage loan each month. If our monthly rent can pay off the entire monthly loan, then we have less of an issue. However, if we need to constantly top up the amount, it will get more complicated and potentially more costly too. In the scenario that we do not get payment from our tenant on time or we have a gap between finding new tenants, then we may also have to stump more cash from our pocket.
When investing in REITs, we don’t have to meet these financial obligations. The REIT manager takes care of it.
All we have to do is pay for our REIT investment. Currently, all six US-pure-play S-REITs are denominated in USD. Since United Hampshire US REIT is currently trading at US$0.63, the minimum investment we need is just US$63 to buy 100 of its units. While it is possible, this might not make sense if we take our stock brokerage fees into consideration.
If we choose to invest in it, we also have to convert our SGD into USD via a good exchange rate. We can either rely on our stock brokerage firm to make the conversion for us, or we can pay in USD with many stock brokerages as well.
While we can employ some leverage when investing in REITs, it is typically not as high as with physical properties. On the other hand, we have to understand that REITs are themselves geared up already. REITs in Singapore have a leverage limit of up to 50%. A REIT like United Hampshire US REIT has a conservative gearing ratio of 39.0%.
#3 Managing A Property In The US
Even if we own a good property, its investment success hinges on how well we are able to manage the property.
To flesh out a few things, we need to ensure that our property is maintained in a good condition, we have to be able to rent it out at a good rate, we need to monitor the property and collections (and know what to do if we don’t get it on time), we can also actively monitor situations where we can refinance our home loan at a better rate, we need to pay taxes on time and shoulder so many other worries of a property owner.
If we invest in a REIT, this is done by the REIT manager and the property manager. For the benefit of a professional management team, a fee is paid by the REIT to the REIT and property managers. We can easily find the United Hampshire REIT management team on its website, and see they have deep experience in the real estate industry.
The REIT management team also works with the property management team to optimise their properties – making it a more desirable location and potentially earning better rental income.
In its latest FY2021 investor presentation, United Hampshire US REIT’s manager highlighted the completion of a new self-storage facility and expansion of one of its location, as well as installing EV charging stations and solar panels at other properties.
In the course of managing the REIT, the managers can also choose to buy or sell properties. This is typically not within our control as smaller retail investors. Nevertheless, such decisions have to be approved by majority of the unitholders at a general meeting.
Currently, United Hampshire US REIT is divesting two of its self-storage facilities. In its announcements, the REIT manager explained that this will benefit unitholders as the properties being sold are still in the stabilisation stage with lower occupancy. The funds from the sale can go into investments with better yields. Secondly, the proceeds from the sale will also strengthen its balance sheet. Thirdly, the sale price represents a 17.7% increase from its book value and 4.9% above its purchase price (inclusive of a Top-Up value).
#4 Selling Your Property In The US
When we sell a physical property, there’s a lot of hidden effort that goes into the transaction. We want to sell at a good price, which may be challenging to discover.
Having decided to sell, we would also want to complete the transaction as quickly as possible. However, to get a good price, we need to be patient enough to find the right buyer. This may take several months. In certain instances, if we need the money urgently, we may have to let go of the property at a sale.
It works differently if we need to cash out of our REIT investment quickly. Our sale does nothing to affect the REIT’s property portfolio.
We can sell our units nearly instantaneously at the market price, and receive our proceeds within a few days. Of course, we need the market to be open for trading. If we own a REIT that is listed in the US, the trading hours are going to be in the middle of the night for Singapore investors.
#5 Property-Related Taxes
The legal and taxation system in the US can be new to us, and we may need to pay for professional advice. We likely have to pay income tax on our rental income and property tax on its value. This amount may also differ according to the actual location of our property. When we sell a physical property in the US, there will also be a capital gains tax that we have to pay.
If we choose to invest in a REIT, we don’t have to think of these details. It is the REIT manager’s job to optimise it on our behalf.
However, for those who invest in US-listed stocks, we will be aware that there is a 30% withholding tax on dividends paid out. We can avoid this 30% US withholding taxes when investing in an SGX-listed REIT with US properties, such as United Hampshire US REIT, by completing the IRS Form W-8. However, this is not the case if we invested in a US-listed REIT.
In Singapore, the REIT manager will send new investors the form to be completed. We can also visit their individual website or write to their investor relations team at [email protected] for more details.
Another tax-related question we need to consider is the estate tax laws in the US, which can be as high as 40%. It is also not something we’re familiar with, and may need legal and tax advice if we own a physical property.
Ensuring Our Investment Is Safe
We have to accept that there will be some risk on any investment we make. One risk we have to accept when investing in US properties (or any other overseas investment) is currency risk.
While the SGD to USD pairing fluctuates, it has appreciated less than 2% in the past five years. Given the movements in recent months (shown in the chart below), the USD looks to be gaining back more ground on the SGD.
To minimise our risk, we can also look at the type of property we are investing in. In the current economic landscape, retail or office properties may still be in the midst of recovery. COVID-19 has further spurred e-commerce and made work-from-home much more common and acceptable.
If we look at United Hampshire US REIT’s portfolio of grocery and necessity-anchored properties, we can tell that they are highly resilient against downturns. As covered earlier, footfall remained consistent for its grocery-related property type. This underpinned an 8% increase in its 2H2021 revenue compared to 2H2020. Further, the valuation of its property portfolio rose 3.7% to US$607 million (as at 31 December 2021) compared to the year before. Even though its properties are relatively defensive, United Hampshire US REIT currently pays a distribution yield of 9.8%.
Another hallmark of investing in a defensive portfolio is longer Weighted Average Lease Expiry (WALE). This number represents the average expiry period of all leases. United Hampshire US REIT’s WALE is 8 years, which gives us strong visibility into its future distributions to unitholders.
Moreover, just 1.5% of its leases are expiring in 2022 – a number that was brought down from 9.2% the year before. This further highlights its leasing strength and proactive management.
Finally, and perhaps a big difference between owning a physical property and investing in a REIT is diversification. We can only buy a few physical properties at most.
If we choose to invest in a REIT, we gain exposure to multiple properties across various regions. By owning many properties, the impact of some vacancy is absorbed by the rest of the properties. United Hampshire US REIT’s current occupancy rate is 95.3%. If we cannot rent out our physical property, we could be in trouble, especially if our mortgage repayment depends on the rental income. In fact, even if we had some gap between tenants moving in and out, we may be quite severely impacted.