As the REIT market grows in SGX with the listing of an increasing number of REITs, investors may end up with a different sort of problem on their hands — that of being spoilt for choice! REIT investments in Singapore are diverse, ranging from retail REITs and office REITs to healthcare REITs and even niche ones like data centre REITs. There are also REITs with exposure to specific markets such as the US and Europe.
I break up the REIT universe into five broad categories — retail, commercial (i.e., office), industrial, healthcare, and hospitality — and assess which category offers investors the most stability with the least risk. Do note, though, that the least-risky REITs may also end up having the lowest distribution per unit (DPU) or portfolio growth — that’s simply a trade-off that comes with the territory.
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Retail REITs are the most “recognisable” REITs among investors as they usually own portfolios consisting of suburban malls that people visit on a daily or weekly basis. Some well-known retail REITs include Frasers Centrepoint Trust (SGX: J69U) and CapitaLand Mall Trust (SGX: C38U).
Retail malls are vulnerable to periods where the economy slows and the unemployment rate creeps up. As people lose their jobs, they usually consume less, resulting in tenants suffering from poorer sales. Some tenants may not be able to sustain the rentals and are forced to bow out. The REIT will thus suffer from lower occupancy rates and also negative rental reversions. These hits will affect their DPU in future periods.
Commercial REITs are generally more resilient compared to retail REITs as the tenants are major corporations that lease significant amounts of space for their operations. Such REITs are usually more sensitive to country- and region-specific risks, such as the effects of Brexit on the United Kingdom. If corporations decide to relocate their offices out of a country to a lower cost country or one with a more stable economic or political system, commercial REITs may suffer from high vacancy rates and may be forced to cut DPU to conserve cash. Examples of high-profile commercial REITs include CapitaLand Commercial Trust (SGX: C61U) and Manulife US REIT (SGX: BTOU).
Industrial REITs are a mixed bunch, depending on where their properties are located. Those with the majority of their industrial or logistics properties located in Singapore may suffer from negative rental reversion and poor occupancy rates due to over-supply here, and there is also the issue of the short tenures (60 years) for the industrial leasehold property in Singapore. Industrial REITs with overseas assets may enjoy much longer tenures (such as 999 years), or even freehold.
Industrial REITs are also sensitive to economic cycles, and properties that are leased out to weaker tenants may face the most problems when a downturn arrives. Such REITs are also vulnerable to country-specific industrial supply and demand dynamics. Examples of industrial REITs include Mapletree Industrial Trust (SGX: ME8U) and Ascendas REIT (SGX: A17U)
Healthcare is known to be a recession-resistant industry, and healthcare REITs are, by extension, also protected from downturns thanks to the consistent demand for medical services. This is probably the type of REIT that can provide the most stability during tough times, but investors should note that a healthcare REIT’s DPU may not grow much even during good times as hospitals work on master leases where the rental escalation may not be high. Examples of healthcare REITs are First REIT (SGX: AW9U) and Parkway Life REIT (SGX: C2PU).
Hospitality REITs consist of portfolios of hotels and serviced residences. Such REITs usually contain reputable “branded” hotel chains that provide a boost for unitholders in terms of track record. However, the main issue with hospitality REITs is that the “tenants” (i.e., hotel guests) are not locked in for long periods of time. Therefore, even if the REIT’s properties are under a master lease agreement, revenue may be volatile due to the variable rent component.
Hospitality REITs usually trade at a higher yield to reflect the risks of low occupancy of hotels during downturns, while the hotels still have a high layer of fixed costs. Examples of hospitality REITs include Frasers Hospitality Trust (SGX: ACV) and Far East Hospitality Trust (SGX: Q5T).
The best kind of REIT?
The REITs offering the most stability in times of turbulence would have to be healthcare REITs, as healthcare is an industry relatively immune to recessions. However, investors should be wary of the valuations of such REITs as they are likely to be very high due to their stable, safe nature. Such REITs may, therefore, offer a very low yield to compensate for the peace of mind they offer.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Frasers Centrepoint Trust, CapitaLand Mall Trust, CapitaLand Commercial Trust, Manulife US REIT, Mapletree Industrial Trust, Ascendas REIT, First REIT, and Parkway Life REIT. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.