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Guide To Understanding & Analysing REITs in Singapore

It’s hard to separate Singaporeans from properties.


REITs are back in vogue

In Singapore, REITs (Real Estate Investment Trusts) are often heralded for their high dividend yields (typically ranging from 4% to 8%), low-entry diversification into real estate, and their liquidity as compared to physical investments. In fact, Singapore is the largest REIT market in Asia ex Japan.

Singapore listed REITs invest in properties, not just in Singapore but also across the world, from the iconic Marina Bay Financial Centre to the Amsterdam Data Centre, and even CapitaMalls in China. REITs work by pooling together monies from investors to buy properties, lease and collect rent from these properties. They are also mandated to pay at least 90% of their earnings to investors.

Currently, favourable tailwinds are pushing investors into this asset class. Given the current low-interest rate environment, REITs are able to refinance loans at a lower interest rate, thereby lowering their borrowing costs. And as economies recover from the COVID crisis, cities are seeing increases in rent prices. All these have positive effects on REITs’ income and the dividends investors receive.

Understanding REITs

Just as investors hope that stock prices can appreciate in the long term, REITs share prices can grow moderately as well, though usually, not as high as a growth stock.

Here is a brief look at 4 of the most traded REITs in Singapore (SGX, Sep 2020) and their price charts:

Since REITs pay out at least 90% of their earnings as dividends, investors naturally focus more on the dividend payouts by these REITs. Here are their results for the year 2020:

Industry Dividends Dividend Yield
Ascendas REIT (A17U.SI) Business space, logistics and distribution centres, industrial properties and data centres 14.688 ¢ 4.74%
Mapletree Log Tr (M44U.SI) Logistics and distribution spaces 8.326 ¢ 4.25%
Frasers L&C Tr (BUOU.SI) Logistics and commercial 7.120 ¢ 4.97%
CapitaLand Integrated Com Tr (C38U.SI) Retail (our shopping malls!) and Office space 8.690 ¢ 3.78%

 

Generally, we look for REITs with a history of growing dividends and high dividend yields (defined as dividends/price of a unit share). At first look, Frasers L&C seemed to offer the highest dividend yield, while CapitaLand Integrated Com (let’s call it CapitaCom for short) has the lowest. In fact, its dividends decreased by 27.4% year-on-year in 2020 owing to the decrease in footfall in shopping malls and offices during the pandemic. In good times though, its dividends yield was pretty high at 5.93% in 2019.

CapitaCom 2017 2018 2019 2020
Dividends 11.510 ¢ 11.860 ¢ 12.340 ¢ 8.690 ¢
Yield 5.61% 5.22% 5.93% 3.78%

 

Digging deeper into CapitaCom’s financial report, we can see that the REIT provided a tenant support programme to help retailers cope with the Covid-19 crisis. This accounts for its lower revenue and consequently lower than average dividend yield.

Source: CatpitaCom’s FY2020 Slides

Growth Outlook

However, the saying goes: “past results do not guarantee future performance”. With the dividend announced being in the past already, we are only interested in what future payouts might be. To do this, let’s look at management’s strategies going forward.

Source: CatpitaCom’s FY2020 Slides

 

We can see here that management expects the phase 3 reopening to be a positive catalyst for the retail sector here in Singapore but hiring sentiments (which is correlated with business growth) remain cautious. It is important here that readers do their own macro-economic research, in addition to management’s guidance, to get different insights to the future outlook. Here, we look at industry reports from Singapore Retailers Association and see that in-store sales for Dec 2020 have roughly recovered to their pre-covid levels for the retail sector, thus conferring that rental income may follow suit as well.

Source: Impact of COVID-19 on the Retail and Food & Beverage Services Sectors, Issue 1

Next, we continue doing this for Singapore’s Office Sector, and Germany’s Office Sector. Websites such as property advisory company Knight Frank, and Savills offer free detailed rental-type specific reports ranging from the residential market to the office market. Below, we can see Knight Frank Research reported that office space declined by 1% quarter-on-quarter as the prevailing hybrid workspace model means that less workers are returning to the office. This could negatively impact CapitaCom’s Office revenues.

Source: Knight Frank

Future Strategy

Often, management would include future developments as well. While its hard to find faults with renovation of existing assets, do look out for acquisitions and new buildings popping up in its portfolio as they incur higher costs to the REIT and affect subsequent earnings significantly. CapitaSpring, is a 51-storey skyscraper in the CBD that will be completed in the second half of the year and will boost CapitaCom’s portfolio. The important metric to look at? The new asset’s utilisation rate. According to Straits Times, 38% of CapitaSpring’s net lettable area of 647,000sq ft has been taken up. Another 22% is under advanced lease negotiations and more than 60% occupancy is expected by completion. This seems quite far off the 90% occupancy compared to CapitaCom’s other CBD assets, but it won’t be a huge concern. CapitaSpring will be the only Grade A office development completed this year and redevelopments such as AXA Tower and Fuji Xerox Towers have constrained Singapore’s CBD office supply. Thus, we may expect a healthy take-up rate of the space.

Source: CatpitaCom’s FY2020 Slides

This information usually comprises the bulk of what readers need to form a clear picture of how the REIT will fare in the future. To emphasise, investors should do their own diligence by reading the financial reports by the company.

Typically, you can find this information on the company’s website, click the tab under Investor Relations, navigate to Financial Results > and choose Presentations (Authors Note: presentations are usually easier to read as compared to the statements and press releases)

Risk Mitigation Strategies

Compared to other investments such as stocks and bonds, REITs are subjected to their own unique risk factors. For the prudent investors out there, it’s good practice to take steps to mitigate those risks and maximise your returns.

#1 Be Cautious When A REIT Offers Exceptionally High Dividend Yield (>10%).

First REIT (AW9U.SI) is a Singapore healthcare REIT with an eye-watering dividend yield of 12.8%; while its share price paints a different picture – declining by 80% in a 5-year-span. The main reason for this decline was a rights issue by First REIT’s management that investors are unhappy about. The rights issue was intended to avoid an imminent default of 39.8% of total debt, or about $196.6 million, but would dilute shareholder’s dividends. In addition, its distributable income for FY2020 plunged 51.2% to $33.4 million year-on-year. A high dividend yield is usually a tell-tale sign as REITs seek to compensate investors for these greater risks. Thus, investors should scrutinise such trusts carefully.

#2 Portfolio Risk

Occupancy rate is one of the important metrics to consider when evaluating the risk of the REIT’s portfolio of properties. Ideally, we’d like to see a near 100% occupancy rate which means that the asset is generating close to maximum returns.

For CapitaCom, its overall portfolio occupancy rate is 96.4%, with retail at 98.0%, office at 94.9% and integrated developments at 97.8%. The root cause of the lower office occupancy rate seems to be its property as Six Battery Road, but the reason is inconsequential as it is due to phased upgrading works in the building.

Source: CatpitaCom’s FY2020 Slides

Second is lease expiry. It informs you how stable rental incomes will be in the future. The more leases expiring, the less stable the REIT’s income will be. Here we see that CapitaCom’s retail weighted average lease expiry (WALE) is at 1.8 years (on the top), lower than its competitor MapleTree Commercial Trust’s WALE at 2.1 years (at the bottom). Thus, we can expect greater volatility in CapitaCom’s future income, as compared to MapleTree’s, which is in a stronger position.

Source: CatpitaCom’s FY2020 Slides & MapleTree Commercial Trust FY2020 Slides

Next is customer concentration risk. If the REIT depends on only a few tenants for a majority of its lease income, the loss of one key client can derail its revenues. It’s helpful to look at its list of tenants too. For retail properties, footfall is largely generated by anchor clients such as supermarkets and department stores. For office properties, government corporations tend to be stickier customers during a recession.

Source: CatpitaCom’s FY2020 Slides

One last factor is the gearing ratio. Also known as aggregated leverage, it’s calculated by dividing total debt by shareholders equity. A lower gearing ratio is a sign of a financially-healthy REIT and greater potential to use debt for future acquisitions. In Singapore, MAS imposes a leverage limit of 50% for S-REITs to safeguard against a situation where the REIT is unable to payback its debt. CapitaCom’s gearing ratio at 40.6%, is higher than the average S-REIT’s 36.8%.

#3 Activity of Institutional Investors

Noting the capital market conditions is important before buying REITs, in particular the institutional demand (which often buy/sell large volumes of shares). In the short run, this demand can often overwhelm fundamentals. One can simply accomplish by Google searching “the REIT you want to buy” + “institutional investors” and scroll to the news section. Here’s an example:

It’s a lot to digest, but we hope that you now have a better clue of what to look at when analysing REITs. They are stunningly interesting to look at, giving you a better glimpse of the properties around us, and perhaps even to consider investing into. But remember, always do your due diligence!

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