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The Pros and Cons of Investing in REITs With Overseas Portfolios

Real estate investment trusts (REITs) are a great way for investors to diversify their portfolio. In Singapore, there are more than 40 REITs and stapled trusts, providing investors with a vast array of options.

Some REITs also have a portfolio of properties that are not located in Singapore, offering local investors the chance to diversify overseas. However, as with any investment, REITs with overseas portfolios do come with their own set of risks.

In this article, I will share some things that investors should consider when investing in REITs with overseas portfolios.

The pros

Investing in REITs with overseas portfolios offer investors many potential benefits. Besides providing investors with the ability to diversify their portfolio to include exposure to overseas real estate, these REITs also generally provide higher yields.

For instance, the top three yielding REITs at the moment are Dasin Retail Trust (SGX: CEDU), EC World Real Estate Investment Trust (SGX: BWCU) and Lippo Malls Indonesia Retail Trust (SGX: D5IU). They have distribution yields of around 9%, 8.5% and 10.5% respectively.

Dasin Retail Trust and EC World REIT are China-focused REITs with portfolios solely in China, while Lippo Malls Indonesia Retail Trust primarily invests in shopping malls in Indonesia.

REITs with portfolios concentrated overseas also often trade at lower price-to-book valuations than REITs with mainly Singapore-based portfolios.

The cons

There are a few possible reasons why REITs with overseas portfolios may trade at significant discounts to their Singapore-based peers.

One, investors might not be willing to invest in REITs with properties that they are unable to inspect for themselves.

Two, REITs that have international exposure have currency risk. If the local currency that the REIT operates in devalues against the Singapore dollar, its distributable income and distribution per unit may be affected. The Indian rupee, Australian dollar and Indonesian rupiah have all devalued significantly against the Singapore dollar in recent years.

Three, Singapore generally has a lower interest rate than many other countries. As such, REITs that invest in Singapore properties enjoy lower interest rates on their debt. On the contrary, REITs with international exposure often have higher interest rates and lower interest cover ratios.

Country-specific regulations may also affect the ability of the REITs to pay out distributions to its unitholders. For instance, Indonesia recently imposed new withholding tax rules. Lippo Malls Indonesia Retail Trust said that there would be a material impact from the latest laws.

The Foolish bottom line

Investors in Singapore are blessed with a multitude of options to choose from.

REITs with overseas exposure offer investors a unique opportunity to invest in real estate outside of our country and often also boast higher yields than their Singapore-based peers. However, at the same time, numerous risks could impact such a REIT’s distribution to unitholders. When investing in REITs with overseas exposure, investors should carefully evaluate each of the risks and ensure that the risk-reward profile suits their investment objective.

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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 contributor Jeremy Chia owns units in EC World Real Estate Investment Trust.