Want to expand your portfolio and invest in other asset classes such as the Real Estate Investment Trusts (REITs)? By investing in a variety of asset classes, a diversified portfolio not only helps you to reduce risk and volatility, but also to gain access to potentially higher returns. In this article, we will provide an overview of REITs as well as some of the key metrics that you can use to evaluate and select the best REITs to invest in.
Background and the Development of REITs in Singapore
In 1999, rules were introduced by the Monetary Authority of Singapore (MAS) to regulate Singapore REITs (S-REITs); three years later, CapitaMall Trust became the first REIT listed on Singapore Exchange Securities Trading Limited (SGX-ST) in July 2002. In the next five years, S-REITs experienced exponential growth and a total of 20 S-REITs had been listed and traded on the Singapore Exchange (SGX) Mainboard. Although the market was inactive during the global financial crisis between 2008 and 2009, it made a comeback in 2010 with three S-REITs being listed that year. Following which, there have also been several changes made to S-REIT regulations so as to enhance the regulatory regime governing S-REITs, hence further promoting the S-REIT market while at the same time, tightening regulatory requirements to protect S-REIT unitholders.
But… What Exactly Is a REIT and What Are the Main Benefits?
Typically, REITs are collective investment vehicles that invest in a diversified pool of professionally managed real estate assets. Without having to invest directly in the real estate market which requires a much larger capital outlay, REITs also provide investors with returns that closely replicate direct ownership, greater diversification and liquidity through the equity capital markets. The underlying assets in a REIT provide capital growth, and the steady rental cash flow provides investors with income via regular distributions — in Singapore, REITs are required to distribute at least 90% of taxable income yearly to unitholders but currently, most of the REITs are giving out 100%.
In summary, key features of a REIT include:
- An investment in a diversified pool of income-producing real estate assets
- Typically structured as a unit trust or corporation, and are listed and traded on a stock exchange
- High yield: REITs usually have high pay-out ratios that are mandated in REIT codes e.g. 90% of taxable income to unitholders.
- Can be managed by either an external, third-party manager or an internal, employed manager: In Asia (excluding Australia), REITs and RE Business Trusts are mainly externally managed; exceptions are Link REIT in Hong Kong and Croesus Retail Trust in Singapore.
- Flow-through taxation: As long as the REIT distributes at least 90% of its taxable income to unitholders, the REIT will not be taxed on its income, and instead unitholders will be taxed on their distributions according to their tax status.
Structure of a typical REIT (Source: OUE Commercial REIT)
How to Find the Best Real Estate Investment Trusts (REITs)?
At time of writing, there is a total of 36 REITs and property-related stapled securities and trusts.
REITs are purchased and sold, just like shares. The given price of a REIT is the price per share (or per unit) and they are sold in lots of 1,000. If a REIT has a listed price of $1.48, the minimum purchase would be $1.48 x 1,000 = $1,480.
To invest in the best REITs i.e. those with lower risks and higher returns that will enhance your investment portfolio, it is paramount to look at the following key metrics of each REIT:
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Mistakes Made by Property Investors
Are you Investing or Gambling?
Property Investment is never about luck or emotional buying. On many occasions, we see consumers hopping from different new project show units just to find “the Right One”. But how exactly will this “Right one” presents itself in the face of consumers?
If you had answered “Ambience” and “Feel” of the unit, you are emotional buying. Many times, these feelings have clouded the analytical skills of the consumers, making them overlook other critical aspects such as the land appreciation, location, sensitive pricing/discounts and market sentiments. By the time when the consumers are prospecting for new house, they will themselves in situation where their current property is not fetching the desired price and they have missed the opportune time to enter the market.
Real investors are clear with their goals and what they want out of their property investments. They do not rely on hope that the market will one day, change in their favour. Rather, they are aware of the cycle and when to make the “Right move”.
So, are you an investor or gambler? If you are determined to be a savvy investor, you will definitely be interested in the following.
How do you Determine the Right Cycle, the Right Time and Right Price to Enter?
At the first, second and even third glance, you may not be able to figure out all the information which this chart is trying to convey. However, if you study in detail or with some guidance, you will be able to mark out a certain trend that is brewing in the market.
Based on this cycle, you can also identify the best opportune time and price to enter the market.
So the Question now is:
Is This the Right Time to Buy in Today’s Market?
Just understanding the cycle is not sufficient.
Here are the 5 Essential Elements which you Must Know in order to build Successful Investment Portfolio in CCR Segment:
1. What are the Impacts of the Latest Announcement of the Reduction in Government Land Sale?
2. Supply vs Demand
Should we buy when the supply is plenty in the market?
3. Location vs Entry Price
Which is more important? Many always think that buying a good location near MRT is the safest bet as it is easier to rent out. However, is that really true?
4. New Launch vs Resale Property
Are you aware which one is likely to drive higher profit margin?
5. How can we secure the First Mover Advantage?
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