The Singapore stock market’s first-ever real estate investment trust – CapitaLand Mall Trust (SGX: C38U) – was listed 14 years ago in 2002. Since then, the market for REITs in Singapore has taken off.
In the past, property companies tended to focus on developing properties and then selling them. This holds true even for commercial offices and other types of non-residential real estate. The sold properties would give the property company a profit and the company would then recycle that capital by purchasing a new plot of land.
But over time, many property companies changed. Today, it’s common to see real estate companies pursue a new type of business model: The management of REITs.
Property developers such as Frasers Centrepoint Ltd (SGX: TQ5), CapitaLand Limited (SGX: C31) (which is the sponsor of CapitaLand Mall Trust), City Developments Limited (SGX: C09), and even Keppel Corporation Limited (SGX: BN4), all currently have their own REITs and REIT-management arm.
Some, such as Frasers Centrepoint, are focused on building up recurring income and the recurring portion include profits from the REITs and the fees that come with being a REIT manager.
Property developers traditionally tend to have lumpy earnings and huge capital expenditures under the old business model. But that may no longer be true with the REIT management model. If a property company continues to build up its recurring income via management and other related-fees from its sponsored REITs, there might come a point in time when the recurring portion of its revenue and earnings is far greater than its development business.
Moreover, given that a property developer has an option to recycle its capital through a sale of assets to its own REITs, the capital requirements for the company in the future may not be as high as before.
Can investors one day view property companies not as cyclical, lumpy, and capital intensive businesses, but as businesses with recurring income and low capital requirements? And, how might the whole real estate development industry look like if there’s ever such a day? These are all interesting questions for investors to ponder on the future of the real estate industry.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Keppel Corporation and Frasers Centrepoint.