Real estate investment trusts (REITs) have come a long way here since Singapore’s first REIT got listed in the market in 2002.
Since then, the number of REIT listings on the SGX has blossomed to a total of 26, in addition to six other stapled securities (a stapled security typically consists of a business trust and a REIT). You can see a listing of all the REITs and stapled securities here.
With the number of REITs have grown so much over the past decade, it would be helpful to know what the advantages of investing in REITs are.
For this, we can turn to author Bobby Jayaraman and his book Building Wealth Through REITs. Mr. Jayaraman also happens to be the Chairman of the Remuneration Committee for an SGX-listed company, Second Chance Properties Ltd (SGX: 528).
For the purpose of this article, I have also used a comparison with buying your own property in Singapore to illustrate the advantages of REITs. Below are some of the tips I picked up from his book:
As opposed to buying your own property, REITs can offer wide diversification through the number of properties that they own.
For instance, when you buy into a REIT like Capitamall Trust (SGX: C38U), you get to own a small piece of 15 different shopping malls around Singapore. These malls come with more than 3,000 leases from a diversified set of tenants, ranging from the telecommunications industry to the food and beverage industry. Such diversification could be less risky compared to owning just one or two properties on your own.
Beyond diversification, REITs also offer industry and cross border exposure for the private investor.
Let’s take First Real Estate Investment Trust (SGX: AW9U) as an example. Investors in the REIT would have access to contributions from the healthcare industry with 12 hospitals and healthcare facilities located in Indonesia. This lessens the need for the private investor to personally venture into a foreign country in search of properties to invest.
The lot size change from 1,000 units to 100 units this week also gives the private investor access to REITs at very affordable sums.
For example, units of Ascendas Real Estate Investment Trust (SGX: A17U) closed at S$2.52 yesterday. For a REIT that is focused on the business and industrial parks space, a single lot can be purchased for just $252. In contrast, buying a single property is likely to set an investor back by a five-digit sum of money or more.
Furthermore, individual properties may be difficult to sell as it takes time to market the property, and then a few more months to run through the transaction process related to the sale. On the flipside, REITs which are listed on the SGX can provide liquidity as it can be sold with the click of a button or two.
Per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of its profits as dividends to enjoy tax transparency. Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns, and the dividend distribution which typically happens every quarter.
For instance, commercial real estate owner Keppel REIT (SGX: K71U) reported its earnings on Monday this week. The REIT closed its fiscal year by reporting a total of 7.23 cents in distribution per unit for the financial year ended 31 December 2014. At its closing price of $1.24 yesterday, it would represent a distribution yield of 5.8%.
The advantages above are to highlight the benefits that you might get from investing in REITs. But just like any other investment, there are risks to note and due diligence to be done before investing in any REIT. Check back for my next article on the disadvantages of REITs.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.