REITs have become a significant part of Singapore’s investment universe as our local stock market has built up a reputation for attracting REIT listings. With a wide range of REITs from which to choose, investors are spoilt for choice. As more and more REITs list on our shores over time, the number of choices keeps increasing, making it a tough call to sift out the wheat from the chaff.
In order to choose REITs with the best and most stable characteristics, I suggest looking at three key aspects: a REIT’s sponsor, its WALE (or weighted average lease expiry), and its level of diversification. We’ll also look at a few examples of REITs that are appealing in these categories.
1. A strong sponsor
A sponsor for a REIT is a company or entity that supports the REIT and may also assist with other functions that are beneficial for the REIT. These include, but are not limited to, helping the REIT to source for credit or equity (for fundraising), having a pipeline of assets for potential injection into the REIT, as well as providing expertise in the buying or selling of properties within the REIT. In a nutshell, sponsors provide a range of useful services and act as a sort of “guardian” for the REIT. Strong sponsors have long track records and stellar reputations in the real estate market, thus lending more credibility to the REITs they manage.
Two examples of strong sponsors include Mapletree Investments Pte Ltd and Frasers Property Ltd (SGX: TQ5). Some of the REITs they manage include Mapletree Commercial Trust (SGX: N21U), Mapletree Logistics Trust (SGX: M44U), Frasers Logistics and Industrial Trust (SGX: BUOU), and Frasers Centrepoint Trust (SGX: J69U).
2. A long WALE
Something else to watch out for is the weighted average lease expiry profile of the REIT, also known as the WALE. This metric measures the average lease expiry for tenants within the properties owned by the REIT, and the “weighted” part adjusts the lease profile by the gross income (or net lettable area) of each tenant. A long WALE is obviously better for a REIT as it provides predictability and certainty for its rental income stream, providing a higher level of assurance to unit-holders.
Two REITs with fairly long WALEs are Keppel DC REIT (SGX: AJBU) and Frasers Logistics and Industrial Trust. The former has a WALE of 8.0 years as of 31 March 2019, while the latter has a WALE of 6.61 years across its properties in both Australia and Europe.
The third aspect to consider is whether the REIT is adequately diversified among its properties. “Diversification” here has two meanings: One is that the REIT should have a sufficient number of properties within its portfolio such that it does not heavily rely on any one property for the majority of its income. The second meaning is that ideally, the REIT owns properties that are geographically scattered so that natural disasters such as typhoons or earthquakes would not have an adverse effect on the bulk of the portfolio.
An example of a REIT that’s very concentrated is Dasin Retail Trust (SGX: CEDU). It only owns four properties, all of which are located in Zhongshan City in China. By contrast, Frasers Logistics and Industrial Trust‘s portfolio contains 82 properties that are geographically spread out across three countries: Australia, Germany, and the Netherlands.
By focusing on these three aspects, REIT investors can ensure they mitigate their risks and increase their certainty with respect to the yields they are getting.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Frasers Centrepoint Trust, Mapletree Commercial Trust, and Mapletree Logistics Trust. Motley Fool Singapore contributor Royston Yang owns shares in Frasers Logistics & Industrial Trust and Keppel DC REIT.