Complete guide to Singapore REIT investing: How to choose the best REIT

What are Singapore REITs?

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. 

Why invest in Singapore REITs?

The real estate assets owned by the REIT are income-generating, and the revenue generated from these assets are distributed to REIT holders on a regular basis. 

For example, a Singapore REIT that owns a portfolio of retail malls would receive rental income from leasing out the space in the shopping mall. 

As a holder of a Singapore REIT, you may receive a share of the income generated as dividends after deducting the costs in running the mall, as well as various fees such as the S-REIT management fees. 

Singapore REITs typically pays out at least 90% of their income to investors, which makes them attractive as steady income generators in a portfolio.

This means that Singapore REITs offer you an affordable way to invest into a large asset such as an entire shopping mall, and share the potential gains from the property’s capital appreciation and rental income. 

Investing in Singapore REITs is easy,  as there is liquidity for you to buy and sell your Singapore REIT holdings on the SGX, just like a stock.

What to look out for when buying Singapore REITs?

Just like a typical stock, different Singapore REITs have different exposure to different industries and markets. This may affect the income the REIT is able to generate and its distributions. 

Hence, before you start investing in Singapore REITs, it is important to do your research and assess whether the characteristics of REIT makes it suitable for your investment portfolio. 

Here is Beansprout’s checklist on what to consider when investing in a Singapore REIT. Our approach is to review the REIT's fundamental strength, financial health and valuation.

It is worth noting that the list is not exhaustive, and is meant just a general guide on some of the key metrics we would look out for.  

#1 – Fundamental strength

A) Quality of sponsor and management

The Singapore REIT sponsor sources the properties that are injected into the initial portfolio of the REIT, and may continue to offer a pipeline of assets for the REIT to acquire.

These sponsors can be large listed corporates or privately held companies with property assets in their portfolios. 

Some names of sponsors that you might be familiar with would be Mapletree Investments, CapitaLand Investment and Keppel Corp. 

The Singapore REIT manager determines the direction of the REIT and is responsible for the execution of its strategy.  

For example, the REIT manager will evaluate various asset acquisitions and divestments with an objective of raising the distributions to unitholders. 

Here, we check if the management strategy suits our portfolio requirements. For example, if we are looking for REITs with predominantly property assets in Singapore, would we be comfortable when the REIT manager expands its mandate to acquire overseas assets?

B) Quality of property portfolio

The tenant mix offers a glimpse of whether the Singapore REIT is able to secure tenants across a wide range of industries. Hence, it is important to look for income diversification and resilience. 

For example, Singapore REITs which have a significant exposure to just one sector such as technology may face more challenges in leasing out their property when the industry is facing pressure. 

The occupancy rate indicates the proportion of the Singapore REIT’s property assets that are leased out, and provides an indication of the rental demand. A consistently high occupancy is an indication of strong demand for its underlying assets.

As can be seen from the chart below, the committed occupancy of most REITs is above 95%.

#2 – Financial health

A) Amount of debt

Singapore REITs make use of debt to purchase the properties, and the interest expense from the borrowings can erode the income that is available for distribution to unitholders.

The amount of debt a Singapore REIT has is usually measured using its gearing level, which is calculated using its total borrowing over its total assets.

There is a regulatory requirement by the Monetary Authority of Singapore (MAS) for Singapore REITs to have a gearing level of below 50%. However, most REITs would typically keep their gearing level at below 40%. 

Here, we look for a lower gearing level, which may translate into lower interest expense for the Singapore REIT, and also more headroom for the Singapore REIT to make acquisitions without hitting the gearing limit.

B) Debt expiry profile

Apart from the total amount of debt held, we can also look at how much debt the Singapore REIT has maturing in each year. 

What we hope to see is a debt expiry profile that is staggered, which allows the Singapore REIT to plan for refinancing its debt or raise sufficient funds to gradually repay these borrowings. 

#3 – Valuation 

A) Price to net asset value

The net asset value of a Singapore REIT refers to underlying value of the property assets it owns, as determined by independent valuers. 

This would take into consideration the rental prospects of the assets, as well as macro-economic factors such as the interest rate environment. 

The price to net asset value (price-NAV), also sometimes known as the price-to-book (P/B) ratio, gives an indication of whether the REIT is overvalued or undervalued compared to the value of its underlying property assets. 

If the P/B is above 1, it would mean that the REIT is valued higher than the underlying property assets. Conversely, if the P/B is below 1, it would mean that the REIT is valued lower than the underlying property assets. 

Price-to-book valuation of Singapore REITs

Source: Updated daily based on data from SGX

B) Dividend yield

The dividend yield indicates how much dividend you would receive as a percentage of the price of the Singapore REIT. 

The higher the dividend yield, the more distributions you would potentially be receiving relative to the capital you would have to put into the Singapore REIT.

However, the Singapore REIT that pays the highest dividend yield may not necessarily be the best REIT to buy.

This may be because investors may perceive that the distributions are not sustainable, and are expecting the dividends to be cut, or that the price of the REIT could go down as its fundamentals weaken.  

What we want to look for is how high is the dividend, and how sustainable in the dividend going forward. If the REIT is able to deliver dividend growth, that would be even better!

Forward dividend yield of Singapore REITs

Source: Updated daily based on data from SGX

What would Beansprout do?

If you are new to Singapore REIT investing, it might be worthwhile to refer to the checklist above when evaluating whether to invest in a Singapore REIT. 

To pick the best Singapore REIT, we look at its fundamental strength, financial health 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.