It’s been over a decade since Real Estate Investment Trusts or REITs appeared on the Singapore scene. The very first being CapitaMall Trust (SGX: C38U) which, with a current market value of S$7.4b, is still the daddy of the REIT sector
Since then, 22 REITs have been added to the list of property companies that is expected to increase again when Mapletree Investments floats its Mapletree Greater China Commercial Trust on the Singapore Exchange in March.
Together the 22 Singapore REITs, otherwise known as S-REITs, cover a gamut of property types from hospitality to hospitals and from residential to retail. Such is the uniqueness of S-REITs that they even have their own sub-sector – the FTSE ST REIT Index (SGX: FSTAS8670).
Five years ago, the index stood at 776 points. Today the index is a smidgen higher at 824 points, which equates to an rise of just 7% in half a decade.
What, you may well ask, is the point of investing in an asset that is growing at a compound rate of just 1% a year?
The answer lies in the dividends. In exchange for a favourable tax treatment, REITs must pay out at least 90% of their profits to shareholder. Consequently, many shareholders might view REITs as a source of regular income with the possibility of some capital gains over time.
Consider Ascendas REIT (SGX: A17U), which is the second-largest REIT on the Singapore market. It is valued at S$5.7b. The company owns over one hundred properties in Singapore that includes science parks, light industrial buildings, warehouses and flatted factories. Over the last five years, shares in Ascendas have fallen from around $2.34 to $2.06. But the investment has, nevertheless, returned around 35% (or 6% a year compounded) after dividends are included.
Currently, shares in Ascendas trade at a premium to its Net Asset Value (NAV). In fact, many Singapore’s REITs are trading at a premium to their NAV. Put another way, investors are prepared to pay more for the asset than they are worth. Consequently, there might be a risk that the shares could fall back if the enthusiasm were to dissipate.
Interestingly though, the downside might be limited given that the median dividend yield at 5.6% is higher than the market average. For instance, AIMS AMP Capital Industrial REIT (SGX: O5RU) and Ascott Residence Trust (SGX: A68U) both sport historical yields of 6.5%. So, a fall in the shares might make the yields more tempting to income seekers.
The upshot is that provided rental yields hold then S-REITs could continue to deliver steady income even though the capital may fluctuate. However, as with any real estate investment, it could be prudent to investigate the underlying assets, which in some cases may be as simple as a bus ride or a short walk to a shopping mall.
Whether REITs are you cup of tea or not, The Motley Fool’s purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock – Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.