Introduction to Singapore REITs: Benefits, Risks and Investment Strategies

What are Real Estate Investment Trusts (REITs) and how do they work?

For many investors who are looking to build a passive income with stable dividend income, Real Estate Investment Trusts (REITs) is often one of the asset classes considered. 

If you are new to REIT investing, REITs are funds that invest in a portfolio of property assets such as shopping malls, offices, and hotels.

Singapore REITs, or S-REITs, are such real estate investment trusts that are listed on the Singapore Exchange (SGX). 

As of December 2022, there were 42 Singapore REITs and property trusts with a total market capitalization of S$100 billion. Read on to find out more about Singapore REITs and property trusts, and how to assess them. 

Investing in Singapore REITs as a source of dividend income

REITs are meant to be income-generating instruments as they enjoy regular rental income flowing from the pool of tenants within their portfolio.

The Inland Revenue Authority of Singapore (IRAS) grants REITs tax-exempt status if they distribute at least 90% of their taxable income each year as distributions.

REITs distribute at least 90% of their taxable income each year as distributions.

Hence, REITs are suitable as income-generating investments and are well-suited for income investors who desire reliable and regular dividends.

As REITs rely on debt financing to operate and carry out acquisitions, the Monetary Authority of Singapore has set a limit of 50% maximum gearing for REITs that have an interest cover ratio of at least 2.5 times.

For REITs that fall below this interest coverage ratio, they are allowed to gear up to a maximum of 45%.

There is a regulatory limit of 50% maximum gearing for REITs that have an interest cover ratio of at least 2.5 times.

Why consider Singapore REITs?

#1: Exposure & Diversification

One great reason to own REITs is that they allow you to have access to different types of properties.

These three REITs own properties that you, as an individual, will find tough or impossible to purchase on your own.

REITs also enable you to achieve significant diversification in their portfolios, which is often unfeasible with physical property purchases due to high costs and debt involvement. 

By investing in REITs, you can easily diversify your portfolio across different property sub-types and geographic regions, protecting yourself from economic downturns in any single sector. 

For instance, CapitaLand Integrated Commercial Trust (CICT) owns retail and commercial properties in Singapore, Australia, and Germany. OUE REIT provides exposure to hospitality and commercial assets in Singapore and China. 

Frasers Centrepoint Trust (FCT) offers exposure to nine retail malls in Singapore’s heartland, while Mapletree Industrial Trust (MIT) includes industrial properties in Singapore and data centres in the US and Japan.

#2: Affordability, Liquidity & Tax advantages

REITs offer an accessible and efficient way to invest in real estate without the high costs and complexities of purchasing physical properties.

You can invest in REITs with a relatively small capital outlay. For instance, you can buy a lot size of 100 units on the Singapore stock market, with Frasers Centrepoint Trust (FCT) priced at just S$229 and CapitaLand Integrated Commercial Trust (CICT) at S$200. 

This is significantly more affordable compared to physical properties, which often cost millions and require loans.

Furthermore, purchasing physical real estate involves dealing with numerous documents and intermediaries like brokers and agents. 

In contrast, REITs are listed on stock exchanges such as the Singapore Exchange, Hong Kong Stock Exchange, or New York Stock Exchange.

You can easily buy or sell REIT units through a brokerage account, which avoids the legal complexities and red tape of physical property transactions. 

Additionally, REITs provide ample liquidity, allowing you to easily buy or sell your units whenever you wish.

Not only that, rental income from physical properties is taxable and must be declared as part of your total earned income. 

REIT distributions, however, are exempted from income tax. REIT investors can enjoy a steady flow of tax-free income. 

REIT distributions are exempted from income tax. 

#3: Regular income and growth potential

REITs provide regular distributions to unitholders, typically on a quarterly or half-yearly basis. This attribute makes REITs a very attractive source of passive income for dividend-seeking investors and are often included in the portfolios of retirees.

Another significant advantage of REITs is the ability for unitholders to reinvest their distributions back into the same REIT. By consistently reinvesting these distributions, you can enjoy the power of compounding that allows your investment portfolio to grow larger over time.

Other than being an income instrument, REITs also have the potential for substantial long-term performance. If a REIT can grow its portfolio of properties along with its distribution per unit (DPU), then its unit price should steadily head higher over the years.

Some examples include acquisitions and redevelopments for quick additions to the portfolio.

Asset enhancement initiatives (AEIs) and rental escalation clauses provide organic rental growth for the REIT’s properties.

Together, they can provide unitholders with a great reason to hold on to their REITs for the long term to enjoy an attractive total shareholder return.

#4: Professionally management & Transparency

All REITs are required to appoint a professional REIT manager.

This manager will manage the portfolio and manage the day-to-day affairs of the REIT.

The manager is in charge of collecting rent from tenants and the upkeep of the properties and is also responsible for capital allocation decisions such as acquisitions and divestments.

Other than that, as REITs are listed on a stock exchange, they are bound by the rules and regulations for listed stocks.

Unitholders will be kept abreast of the latest corporate developments such as new or renewed tenancy agreements, acquisitions, divestments, or asset enhancement initiatives (AEIs).

REITs are also required to publish their financial statements every six months and undergo an annual audit and valuation exercise for their financials and property portfolio, respectively.

Unitholders can be assured that the financials have been scrutinised by auditors and that the property portfolio is updated with the latest available valuations from independent property valuers.

What are the different REIT segments?

Here is a quick introduction to the various types of REITs on the Singapore Exchange along with several examples of each REIT type.

Large-cap REITs

Large-cap REITs, as the name implies, consist of REITs that are found within the Straits Times Index, or STI.

The STI is the bellwether Singapore blue-chip index comprising 30 of the largest companies by market capitalisation.

Examples of such REITs include retail and commercial REIT CapitaLand Integrated Commercial Trust, industrial REIT Mapletree Logistics Trust, and diversified REIT Mapletree Pan Asia Commercial Trust.

Compare large-cap REITs in Singapore here.

Industrial REITs

As the name suggests, industrial REITs are REITs that own a portfolio of industrial real estate.

These can include a wide variety of properties including light industrial buildings, Hi-Tech buildings, business parks, data centres, logistics facilities, flatted factories, and stack-up/ramp-up buildings.

Industrial REITs have remained resilient through the pandemic as demand stayed strong for e-commerce amid a sharp surge in digitalisation, triggering the need for logistics properties, data centres, and industrial warehouses.

Some examples of industrial REITs include Digital Core REIT, AIMS APAC REIT, and ESR-LOGOS REIT.

Compare Industrial REITs in Singapore here.

Retail REITs

Retail REITs are REITs that own a portfolio of retail malls. The REIT manager will manage this retail space and rent space in these properties to tenants.

These malls provide a variety of shops that customers can visit such as food and beverage, household essentials, supermarkets, hardware shops, information technology needs, and clinics, among others.

REITs normally measure the level of footfall through their malls along with tenant sales. A high level of each indicates that their malls are popular and enjoy repeat visits, helping tenants to ring up their cash registers.

Periodically, the REIT manager may refresh the offerings within the malls to keep customers coming back.

AEIs may also be conducted to increase the floor space of each mall or to improve certain aspects of the building (e.g. the façade) to make it more attractive for tenants.

Some examples of retail REITs include Frasers Centrepoint Trust, Starhill Global REIT, United Hampshire US REIT, and Sasseur REIT.

Compare Retail REITs in Singapore here.

Office REITs

Office REITs own and manage office real estate and rent space in these properties to tenants.

Some office REITs focus on a particular market such as central business districts or suburban areas while others may focus on specific tenant sectors such as government agencies.

Examples of office REITs include Keppel REIT, Elite Commercial REIT, Keppel Pacific Oak US REIT and Manulife US REIT.

Compare Office REITs in Singapore here.

Healthcare REITs

Healthcare REITs are a unique REIT category that owns portfolios of healthcare-related assets such as hospitals, clinics, and nursing homes.

Such assets tend to be recession-proof as healthcare is an integral part of any economy.

Occupancy rates tend to be extremely high as such assets are always in demand and can command healthy rentals.

Examples of healthcare REITs include Parkway Life REIT and First REIT.

Compare Healthcare REITs in Singapore here.

Hospitality Trusts

Hospitality trusts own a portfolio of hotels and serviced residences in various parts of the world. These properties service a wide segment of customers from vacationers to business travellers.

They are typically different from other REITs in that the “tenants” are not locked in but are customers who book rooms for stay at the hotel or residence.

This fact makes hospitality trusts more sensitive to economic cycles as they do not have long leases that can generate consistent rental income.

Instead, most hospitality trusts operate based on a master lease agreement with a hotel operator (master lessee).

This master lessee pays a fixed rental plus a variable rent component based on the property’s revenue from operations.

Examples of hospitality trusts include CapitaLand Ascott Trust, Frasers Hospitality Trust and CDL Hospitality Trusts.

Compare Hospitality REITs in Singapore here.

Diversified REITs

Diversified REITs are REITs that own properties that cover more than one property subtype.

For instance, CapitaLand China Trust’s portfolio comprises retail malls as well as business and logistics parks (i.e. industrial properties) in China.

OUE Commercial REIT’s portfolio consists of a mix of commercial and hospitality assets.

Suntec REIT’s portfolio is made up of a mix of retail and office properties that include Suntec City Mall and a one-third interest in One Raffles Quay, among others.

Compare Diverisfied REITs in Singapore here.

What are the risks of Singapore REITs?

Interest Rate Risk

REITs often rely on debt to finance the acquisition of property. Rising interest rates can lead to higher borrowing costs, potentially reducing distributable income and dividend payouts.

As interest rates have been elevated in recent years, the distributions and share prices of Singapore REITs have been negatively impacted. 

Market Volatility

Like all investments, REITs are subject to market fluctuations. Economic downturns or changes in interest rates can impact property values and rental incomes, affecting REIT performance.

For example, the COVID-19 pandemic led to lower occupancy and rental income for selected REIT segments, such as hospitality REITs. This led to a decline in distributions during the period. 

Property Market Risks

The performance of REITs is closely linked to the health of the real estate market. Hence, factors such as changes in tenant demand, increase in supply, or declines in property values can negatively impact REITs.

For example, the COVID-19 pandemic led to lower demand for office space, as companies implemented work-from-home initiatives. This led to a decline in office rents and fall in distributions for office REITs during this period.

How to buy Singapore REITs?

You can buy Singapore REITs through a regulated broker that offers access in the Singapore stock market, such as Tiger Brokers and Moomoo Singapore. 

Check out our guide to the best online brokerage and stock trading platform in Singapore. 

What would Beansprout do?

Singapore REITs can be a worthwhile investment for those seeking stable income and diversification in their portfolios.

However, it's essential to conduct detailed research on the REITs before investing in them. 

You can find the best Singapore REIT for your portfolio by using our Best Singapore REITs screener to compare their dividend yields and valuation. 

If you are looking at an easier way to earn a passive income from Singapore REITs without analysing the REIT in such detail, you can also consider a Singapore REIT ETF, which owns a basket of Singapore REITs. 

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