The unit prices of real estate investment trusts (REITs) in Singapore have had a stellar few months so far in 2019 and amply rewarded investors’ faith in them. In fact, their performance is a timely reminder of the merits of long-term investing and, more specifically, why investing for dividends will always make sense.
Readers may be surprised to know that the FTSE ST Real Estate Investment Trusts Index has actually outperformed the well-known Straits Times Index (SGX: ^STI) from June 2010 to April 2019. The former, consisting of a basket of some of Singaporeans’ favourite REITs, gave investors total returns of an impressive 248% (including dividends) over the period.
Compare that to the Straits Times Index, which contains the 30-largest stocks by market capitalisation in Singapore. Investing in this would have provided you with significantly less total returns of 164% over the same period.
Invest for income AND growth
So, what can the outperformance of REITs be attributed to? For one, lower interest rates in the US set by its central bank, the Federal Reserve (Fed), have seen the demand for income-producing assets globally rise during the past decade. This is no coincidence. And despite what many market watchers have been saying for years, interest rates in the US still remain far below “normal” levels.
Unsurprisingly, this has also been reflected in Singapore given the importance of US policy. If you purchased a 10-year Singapore Government Bond today, it would give you an annual yield of 2.2%. Broadly, when interest rates go up, the yield you receive on “safe” bonds, such as government-issued ones, also increases.
On the whole, this tends to chip away at the appeal of REITs as the yield spread (the difference between the government bond yield and the income yield of REITs) narrows.
But now if you take a look at any relatively large REIT in Singapore, where you could gather a yield of between 5-6.5%, it is strikingly clear why investors hold REITs over the long-term. Not only do you collect the regular income from a REIT, but you are also given access to longer-term capital appreciation in its unit price.
Extrapolate out that yield and capital appreciation over time (think years or even decades) and your returns from investing in REITs will compound at a much faster rate than if you had left your money in cash or put it into government bonds.
Interest rates are set to stay low
Why is this so? Well, when global (or the US) growth slows, generally interest rates are left at the level they are at. More likely than not though, they are cut. Look at the recent turnabout in the stance of the Federal Reserve at the beginning of this year. More interest rate hikes were initially expected throughout 2019, but Fed Chairman Jay Powell said in January:
“What I do know is that we will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track”
This was taken to mean that the likelihood of more interest rate hikes in 2019 had diminished. Add this to fears of a possible recession in the US – in one recent survey two-thirds of American CFOs predicted a recession by the third quarter of 2020 – and you have an environment where the spectre of fast-rising interest rates is highly unlikely.
Foolish Bottom Line
Overall, this means that REITs will likely remain a popular investment choice for investors given the access to both income and growth. Clearly, investing in REITs means that you must take on more risk as an investor versus if you were to invest in a government bond. However, for the longer term investor – both young and old – dividend investing is here to stay.
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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 Tim Phillips doesn’t own shares in any companies mentioned.