Real estate investment trusts (REITs) are well-known for their relatively high and consistent dividend payments. However, not all REITs are made equal. Some will provide higher returns than others.
With that in mind, here are three important but often overlooked aspects of REITs that require your attention.
Ideally, investors should look out for REITs that have properties mainly on freehold land. However, this is not always possible as most commercial or industrial land in Singapore is leasehold. If so, investors should try to look for REITs with land leases that are relatively long.
A REIT that has a long land lease will not have to fret over land leases expiring and the land being returned to the state.
While expiring land leases may eventually be extended, the outcome is not always certain and may require additional payments for an extension.
As such, it is best that investors who have a long-term approach to ensure that the REIT they are investing in has a portfolio with a favourable land lease profile.
Another thing that is often overlooked is the REIT’s tenant profile.
Investors should choose a REIT that has a diversified tenant base. This reduces the risk that a default or non-renewal of a single main tenant’s lease will have a big impact on the REIT’s rental income.
For instance, First Real Estate Investment Trust (SGX: AW9U) has a highly concentrated tenant profile as its main tenant, Lippo Karawaci, accounts for more than 80% of its gross rental income.
When Lippo Karawaci suffered a credit downgrade last year, some First REIT shareholders worried that the Indonesian property giant would not have the means to pay its rent to First REIT.
This led to a steep decline in First REIT’s unit price. While Lippo Karawaci has since raised fresh funds, First REIT still trades well below last year’s peak due to the tenant concentration risk.
The third thing that is sometimes overlooked by investors is the REIT’s portfolio makeup. Investors should find a REIT that has a diversified portfolio both geographically and by property type.
However, this may be a challenge as many REITs have a focused investment mandate. To curtail some of these risks, investors could invest in a basket of different REITs that have different investment mandates, thus reducing their exposure to a single property type or market.
The Foolish bottom line
REITs have become one of Singapore’s favourite investment vehicles. Not only do they provide good yields, but REITs also offer investors exposure to real estate subtypes that were previously inaccessible to the retail investor.
If you are thinking of investing in REITs, hopefully looking out for these three aspects can help you find the most suitable REITs to invest in.
Want to keep reading on how to lock in those sweet REIT dividends? Our Complete Guide To Buying The Best Singapore REITs dives into what we think you need to know about finding the best REITs that regularly hand you a fat dividend cheque. Click here to download your FREE guide.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia owns shares in First Real Estate Investment Trust. The Motley Fool Singapore has a recommendation on First Real Estate Investment Trust.