Real estate investment trusts (REITs) have been gaining in popularity in Singapore. There are already over 30 REITs listed in our local market, and investors have been attracted to them because of their relatively high dividend yields.
However, not all REITs are made equal. Some pose more risk than others, while others have greater potential to deliver larger returns. To separate the wheat from the chaff, here are three red flags you should look out for when investing in REITs.
Singapore REITs are subject to regulations that only allow them to have a maximum gearing ratio of 45%. As such, there are no REITs that are leveraged beyond this.
However, investors should still take note of REITs that are approaching this threshold. REITs that are overly leveraged may face difficulties if and when interest rates rise, and will likely also have less leeway to expand their property portfolio.
Currently, the highest gearing ratio for a REIT in Singapore is 43.2%, while the lowest ratio stands at 25.7%.
Poor broad outlook
Investors in Singapore are blessed with having a multitude of options when it comes to investing in REITs. For instance, REITs can differ in the location of their properties, the types of properties they own, and the size of their portfolio.
Investors, therefore, need to be aware of the broader outlook regarding a REIT. It is important to avoid REITs that are heavily exposed to a sector that is facing severe long-term headwinds.
One such sector is retail. Not only are traditional retail companies staring at a tough environment because of the rise of eCommerce, REITs that own retail properties are also at risk from the eCommerce threat. Investors who are looking at REITs may wish to take note of the recent headwinds affecting retail REITs before making a decision.
Management that has a poor track record
The strength of the management team of a listed company is very often the key to how well its stock price performs over the long-term.
Managing a REIT requires a good understanding of the property market, as well as the foresight to acquire the right properties. The presence of a REIT manager with a poor track record in those two areas, or that has a shady past, may be a red flag for investors.
The Foolish bottom line
REITs are a popular investment product for investors who are looking for consistent dividend payouts. However, investors need to be careful when investing in REITs. As with any investment, there are risks involved. Hopefully, by staying away from REITs that have the red flags mentioned above, we can reduce the risk of our REIT investments going awry.
Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.