How to find the best Singapore REIT for passive income with 3 checks

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Singapore Real Estate Investment Trusts (REITs) often come up when investors think about earning passive income.

Unlike buying a physical property, investing in a REIT allows investors to gain exposure to a portfolio of properties such as malls, offices, logistics warehouses, data centres, hotels and industrial buildings, without having to manage tenants, maintenance or leases directly. 

However, not every REIT with a high distribution yield is a good income investment. 

A high yield may sometimes reflect falling unit prices, weaker rental demand, rising borrowing costs, short lease expiries or concerns that distributions may not be sustainable.

That is why I think investors need to look at more than just the distribution yield when searching for the best Singapore REITs for a sustainable stream of passive income. 

Within Beansprout's four pots of wealth framework, REITs would usually sit within the Income Pot, where we look for investments that can provide a dependable stream of cash flow across market cycles.

In this article, we focus on three simple checks that can help us decide whether a Singapore REIT deserves deeper research for passive income.

Why screening matters when picking Singapore REITs for passive income

Singapore REITs often look attractive because of their regular distributions.

They allow investors to gain exposure to income-producing properties such as malls, offices, logistics warehouses, data centres, hotels and industrial buildings, without having to buy or manage the properties directly.

REITs also tend to be associated with passive income because they collect rental income from their properties and distribute part of this income to unitholders.

But a high distribution yield does not always mean a REIT is a good income investment.

A REIT may offer a high yield because its unit price has fallen. This could reflect concerns about weaker rental demand, rising borrowing costs, short lease expiries or the risk of a distribution cut.

This is why screening is useful. It helps us slow down before getting carried away by the headline yield.

For the Income Pot, I would want to know whether the REIT can keep generating income through different market conditions.

That means looking at whether DPU is stable or growing, whether the balance sheet is healthy, and whether the yield is attractive enough compared with lower-risk alternatives.

However, screening is only the first filter.

It does not replace deeper research into the REIT’s sponsor, property quality, tenant mix, lease expiry profile, refinancing risks or valuation.

Instead, it helps us remove weaker candidates before we spend more time on detailed analysis.

At Beansprout, I would focus on three checks when screening Singapore REITs for passive income:

For me, these three checks are the starting point. If a REIT falls short on DPU, gearing or yield, I would be more cautious before adding it to the Income Pot.

3 checks to screen for the best Singapore REIT for passive income 

Check #1: Check whether DPU has grown over the past one year 

The first thing I would look at is Distribution Per Unit (DPU).

DPU measures how much income a REIT distributes to each unit.

For investors looking for passive income, this is one of the most important numbers to check.

A REIT may report higher revenue or own more properties, but if DPU is falling, the income received by unitholders is still declining.

As a start, I would compare the REIT’s latest full-year DPU with its DPU from the previous year.

Formula:

For an income-focused REIT, I would prefer to see DPU remain stable or grow.

This suggests that the REIT is still able to support its distributions despite changes in rental markets, interest rates or operating costs.

Where possible, I would use the REIT’s full-year DPU, rather than one quarter or one half-year, so that the comparison is more accurate and meaningful.

To understand whether DPU growth is sustainable, I would also look at what is driving it.

DPU is affected by several factors, including distributable income, borrowing costs and lease visibility.

Distributable income tells us how much cash is available for distribution after deducting property expenses, management fees, financing costs and other trust-level expenses.

Higher occupancy, positive rental reversions and rental escalations can support distributable income growth.

On the other hand, vacancies, negative rental reversions and rising expenses can reduce the amount available for distribution.

Cost of debt also matters because REITs rely on borrowings to fund properties and acquisitions.

When borrowing costs rise, finance expenses increase. This can reduce distributable income and put pressure on DPU.

Weighted Average Lease Expiry (WALE) gives us a sense of how visible the REIT’s rental income is.

A longer WALE can provide greater income stability, because fewer leases need to be renewed in the near term.

A shorter WALE may allow rents to be repriced more quickly in a strong rental market, but it also increases the risk of vacancies or negative rental reversions when conditions weaken.

In short, I would not just ask whether DPU has grown. I would also ask what is supporting the DPU growth.

Check #2: Check whether the gearing ratio is below 45%

For REITs, I would look at the gearing ratio, also known as aggregate leverage. This measures how much debt the REIT has compared with its total assets.

Debt is not necessarily bad as a REIT can use debt to acquire properties, improve its portfolio and grow income over time.

But too much debt can make its distributions less reliable and reduce financial flexibility.

When interest rates rise or property values fall, a highly geared REIT may have less room to protect its distributions.

Formula:

In Singapore, there is a regulatory requirement by the Monetary Authority of Singapore (MAS) for Singapore REITs to have a gearing level of below 50%. 

That said, I would prefer the REITs to have a gearing level of below 45%.

This gives the REIT some buffer below the regulatory limit and reduces the risk of being forced into uncomfortable refinancing or equity fundraising.

A gearing ratio below 45% suggests that the REIT is not too stretched relative to its asset base.

This gives it more flexibility to handle vacancies, refinance debt at higher interest rates, or fund acquisitions and asset enhancement works without rushing to raise equity.

If the gearing ratio is close to or above 45%, I would take a closer look at the REIT’s debt maturity profile and how much of its borrowings are on fixed rates.

The trend matters too.

A REIT with stable or falling gearing may have more flexibility to manage its portfolio.

A REIT with rising gearing should be examined more carefully, especially if DPU is not growing at the same time.

You can use our best Singapore REIT screener to compare S-REITs by yield, gearing, valuation and other key metrics.

Check #3: Check whether the distribution yield is worth the risk 

The final check is valuation.

For REITs, valuation asks two questions that should be considered together: is the income meaningful, and is it worth taking on the additional risk of a leveraged real estate investment to earn it?

The most common income metric for REITs is distribution yield.

Formula:

This matters because REITs are not risk-free income products. Their unit prices can fall, borrowing costs can rise, property values can decline, and DPU can be reduced if rental income weakens. 

If a REIT’s yield is too low, the income may not be compelling enough to justify taking on these risks, even if the REIT is well-managed.

 I also compare the yield against lower-risk alternatives.

Every dollar invested in a REIT carries an opportunity cost. The same capital could otherwise be placed in Singapore Savings Bonds, T-bills or fixed deposits.

A REIT distribution yield should therefore offer a meaningful premium over these alternatives.

As a rule of thumb, I would want a quality REIT to offer a yield spread of about 3 percentage points or more over lower-risk benchmarks. 

This is why yield should come at the end of the process.

A high yield is less useful if DPU is falling, gearing is high, leases are expiring soon or distributable income is weakening.

For a passive income portfolio, I would rather ask whether the yield is sustainable before deciding whether it is attractive.

I would also look at the price-to-book ratio as a supporting check.

A REIT trading below book value may look cheap, but it is not automatically a bargain.

The market may be pricing in weaker asset values, lower rental growth or concerns about future distributions.

Likewise, a REIT trading above book value may still be worth studying if it has a strong portfolio, healthy balance sheet and consistent DPU growth.

For REITs, valuation should always be read together with income quality.

You can use our best Singapore REIT screener to compare S-REITs by yield, gearing, valuation and other key metrics.

How to use Beansprout’s Singapore REIT screener to filter for the best S-REIT

You can use our best Singapore REIT screener to compare S-REITs by yield, gearing, valuation and other key metrics.

However, the screen is not meant to give a final buy or sell answer.

It is a starting point.

A REIT that passes the screen is not automatically a good investment. It simply means the REIT has met a basic standard for income, balance sheet strength and valuation, and may deserve deeper research.

If a REIT passes all three checks, I may put it on a refined watchlist.

From there, I would still need to study the REIT’s sponsor, property quality, tenant mix, lease expiry profile, refinancing risks and whether its distribution is sustainable.

If a REIT fails one or more checks, I would be more cautious, even if the headline yield looks attractive.

Here is a simple way to think about it.

There is still room for judgement.

For example, a REIT may report flat DPU because it is going through asset enhancement works or has recently sold a property.

That does not automatically make it a poor income investment, but I would want to understand whether the dip is temporary or structural.

Likewise, a REIT may have a high yield, but that yield may be high because investors are worried about falling DPU, high gearing or upcoming refinancing pressure.

The key is to use the screen consistently.

This helps us avoid chasing a REIT simply because its yield looks attractive, without first checking whether the income behind it can hold up.

What would Beansprout do?

For the Income Pot, I would not start by looking for the Singapore REIT with the highest yield.

I would first check whether the REIT’s DPU has been stable or growing, because that tells me whether the income received by unitholders is holding up.

But I would not stop there.

I would also look at what is supporting the DPU, including distributable income, cost of debt and WALE.

Next, I would check the REIT’s gearing ratio, also known as aggregate leverage. As a guide, I would prefer gearing to be below 45%, with a stable or declining trend.

A REIT with lower gearing may have more room to manage vacancies, refinance debt or fund growth without having to raise equity at an unfavourable time.

Only after these checks would I look at valuation.

As a guide, I would prefer a Singapore REIT to offer a distribution yield with a meaningful spread over lower-risk alternatives such as Singapore Savings Bonds, T-bills and fixed deposits.

The checklist below summarises the three checks to run before taking a closer look at a Singapore REIT.

I would also use the price-to-book ratio as a supporting check, rather than treating a REIT trading below book value as automatically cheap.

A REIT that passes these checks may deserve deeper research for passive income, while one with a high yield but weakening fundamentals deserves more caution.

To put this checklist into practice, you can also use our Singapore REIT screener to compare S-REITs by distribution yield, gearing, P/B ratio and other key metrics. 

If you are looking for 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.

Earlier, we shared that we would consider looking beyond Singapore REITs to Singapore blue chip stocks for more diversified dividend income, especially when the dividends are supported by earnings growth, strong balance sheets and sustainable payout ratios. 

REITs are one way to build income, but they are not the only option. By combining different sources of dividends, investors may be able to build a more resilient income portfolio over time. Learn how to build a more dependable stream of passive income that can hold up across cycles here.

Learn more about Beansprout's four pots of wealth framework to grow your wealth with clarity here.

Which REITs are you looking at to build your income pot for passive income? Share your thoughts in the comments below or join the discussion in our Beansprout Telegram community. 

Planning to invest in REITs? Check out Beansprout's guide to the best stock trading platforms in Singapore with the latest promotions and see the latest promotions and sign-up rewards available. 

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