Intro to REITs

An all-you-need-to-know summary of REITs

Although financial acronyms may sound intimidating, fret not. It really is not that hard to understand.

“REITs as an investment asset class in Singapore will continue to remain as an attractive passive income option.”

Intro to REITs

REITs (real estate investment trusts) invest in RE properties and distribute accrued revenues (mostly rental income) at regular intervals (every quarter / half yearly)

- Managed by REIT managers & property managers (PM) for a fee

- Money is pooled together (fund portfolio), into assets (malls, offices, hotels, etc)

- Goal: income distribution & long-term appreciation

How REITs Work

- Money raised via initial public offering (IPO) from unit holders (investors, UH)

- Pool of RE properties is purchased

- RE properties leased out to tenants

- Income flows back to UH as income distributions (like dividends)

- Most have fees for: annual REIT managers’, property manager’s, trustees’

Roles in REITs

1. Trustee

- Holds assets of REIT on behalf of UH

- May also ensure compliance with all applicable laws & protect certain rights of UH

2. REIT manager (RM) / property manager (PM)

- RM sets & executes direction of REIT according to its stated investment strategy

- e.g. responsible for acquisition & divestment of the REIT’s properties

- For externally-managed model: RM charges a management fee (base + performance fee, & maybe acquisition and divestment fees)

- RM appoints PM to manage RE properties of the REIT

- PM rents out property to achieve the best tenancy mix & rental income, to run marketing events to attract shoppers/tenants and to upkeep the property

- PM charges a property management fee out of the assets of the REIT

3. REIT Sponsor (RS)

- RS sources properties from the initial portfolio of the REIT & may continue to provide a pipeline of REIT assets

- RS may also own stakes in the RM & the REIT

Types of REITs in SG

1. Office (OREIT)

- Focus on office buildings & generate income from renting office space to tenants

- Largest OREIT in SG: CapitaLand Commercial Trust, market cap $6.2 billion

- REIT has announced a proposed merger with CapitaLand Mall Trust to form a new entity, CapitaLand Integrated Commercial first reitTrust, set to be the biggest S-REIT by end-1H20

2. Industrial (IREIT)

- Owns & manages industrial facilities like warehouses & distribution centres, leasing them to tenants

- Largest IREIT in SG, & largest S-REIT by market cap: Ascendas REIT, $10.8 billion

- Industrial sector is seen to be more resilient as compared to others amid covid-19

3. Retail (RREIT)

- Owns malls in SG, rents out retail/shopping space out to tenants

- Tenants with weak footfall (low crowds) might run into cash flow problems & cannot pay rents

- RREITs can be differentiated by type: high-end / suburban malls (orchard vs neighborhood)

- Largest RREIT in SG: CapitaLand Mall Trust, market cap $7 billion

4. Healthcare

- Own & manage healthcare properties like hospitals, nursing homes & medical centres

- Tend to have a master lease structure from sponsor which provides strong revenue visibility

- But if credit issues of sponsors surface, REIT might also be sold off

- 2 healthcare REITs In SG: Parkway Life REIT & First REIT

- PL share price: $2.30 to $3.30 over 5 years

- First share price $1.45 to $0.80 over 5 years

- Underperformance in First REIT might be attributable to issues of sponsor, Lippo Group

5. Hospitality

- Hold properties in hotels & serviced apartments

- Largest in SG: Ascott Residence Trust, market cap $2.8 billion (properties in SG, Australia, Indonesia, Japan, Germany, UK, USA, etc)

- Tends to do well when global economy is booming with a buoyant tourism industry, but suffers in a recession

- Affected most significantly from covid-19

6. Data Centre REITs (DCREIT)

- Own & manage facilities that house customers' server racks used to store, process & distribute data

- Highly sought after for growth potential & defensiveness, even with covid-19

- Only listed DCREIT IN SG: Keppel DCREIT (“I would say it is the best performing REIT in Singapore YTD, but with one of the lowest yields at the moment”)

7. Diversified REITs (DREIT)

- Own & manage mixed property types & collect rent from tenants

- E.g. own assets made up of office & retail properties like Suntec REIT & CapitaLand Integrated Commercial Trust

- Likely to be a structure that most REITs will adopt, given increasing merger activities between REITs to increase AUM & competitiveness

- Largest DREIT: Mapletree Commercial Trust, with office & retail assets

- Owns Mapletree Business City I & II and VivoCity

Why Buy REITs

1. High Yielding Assets

- REITs have over the past 2 decades outperform all asset classes on a Total Return basis (Dividends + stock price appreciation)

2. REITs vs Physical Properties

- Covid-19 has hit hospitality and retail REITs (no tourists & forced closure of many non-essential shops in retail malls)

- Previously, REITs have up to 3 months from the end of FY to distribute 90% of taxable income

- Now extended to 12 months

3. Good Diversification

- Historically provided an efficient way to diversify investments to reduce risk & increase long-term returns

- REITs, as a distinct asset class, show a low-to-moderate correlation with other sectors of the stock market, bonds & other assets.

- As REIT returns do not move with other assets, it smooths a diversified portfolio's overall volatility

- Correlation factor of REITs to most major asset classes are around 0.50 as seen above

- In the current 2020 market sell off, REITs have been more significantly impacted than stocks

- REITs were a little over-valued before recent sell off

- Sell offs in retail & hospitality makes sense, but indiscriminate selling across all industries can only be explained by the rush for cash

4. Tends to be a good inflation hedge

- Provides natural protection against inflation as a vital & tangible asset to our society

- Ascendas REIT believes a key benefit is that REITs provide a natural hedge against inflation

- As inflation rises, value of RE & RE securities are expected to increase too

- Hence can be seen as a substitute for a fixed income portfolio during periods of high inflation

- Some S-REITs have fixed rental escalation clauses, others have rental escalation pegged to the consumer price index

- S-REITs are generally shorter-term in nature (approx. 3 years) allowing landlords greater flexibility to re-price rents to market rates more often which serves as a decent inflation hedge

- Do not underestimate risk of inflation in SG as it will be stagflation, based on context in SG (in recession)

- Stagflation may force i/r to rise, causing increased interest costs, thus REITs will then sell-off big time

5. Competitive long-term performance

Buying S-REITs

1. DIY

- Use quantitative factors to find the “best REITs” and then use qualitative factors

- Even "bad" REITs has value especially if margin of safety ( difference between market price and fair value) is sufficiently huge.

- But for most, just stick with "best-in-class" REITs

- Time taken to evaluate REITs qualitatively (part 2) is much longer

2. ETF (Lump Sum)

- Similar to buying individual REIT counters

- Easily bought via brokerage house on a lump sum basis

- Regular savings plan platforms are also available

- Note that ETF incurs annual expense ratio compared to buying individual REIT counters

- Table below summarises geographical diversification of 3 REIT ETF in SG (Lion-Phillipis the only one that is 100% SG focused)

- Lion-Phillip has the lowest expense ratio, 0.58% while Nikko is at 0.60%

- Surprisingly, Phillip has an atrocious annualized expense ratio, 1.18%

- Likely attributable to lack of economies of scale

- Average NAV of Phillip is only $15.7 million (caa sep 19 financial report)

- Lion-Phillip NAV is $139 million & Nikko NAV is $179 million

- On a turnover basis (half-yearly), Lion-Phillip has the lowest turnover ratio, 15% (could explain slightly lower expense ratio vs. Nikko)

- From recent performance history, Lion-Phillip has outperformed its peers on a 1 year, 6-months and 3-months' time-frame

- Likely due to more resilient nature seen in S-REITs vs. HK & AUS REIT.

- Trailing 12-months yield generated (distribution per share / current share price caa March 2, 2020): Lion Phillip is highest at 5.1% vs. Phillip’s 3.5% (distributions have been irregular with distribution compressed by AUS taxes) & Nikko’s 4.1% (distributions every quarter)

- Lion-Phillip S-REIT ETF: Should you be buying this REIT ETF?

3. ETF (Regular Savings Plan)

- 4 platforms available, shown below

- Phillip APAC doesn't seem to have an option for RSP investment due to small size

- Purchase Lion-Phillip via POEMS Share Builders Plan / OCBC Blue Chip Investment Plan

- Purchase Nikko via DBS Invest-Saver

- FSMOne is the cheapest option to purchase ETFs on RSP but it has no S-REIT ETFs

ETF Summary

- REIT ETFs are a good for broad-based diversification if you do not want to select individual REITs

- Investing in Lion-Phillip provides exposure to the top 26 S-REITs & is 100% SG focused

- Buying REIT ETF on a lump sum basis is similar to purchasing individual stock counters as ETFs are products listed on the SGX

4. Roboadvisor

- Syfe has introduced REIT+ & 100% REIT portfolio

- Most affordable option to invest in a basket of selected high-quality REITs

- REIT+ portfolio has no minimum investment & fees range from 0.4 - 0.65% (those with less than $20k in AUM)

- No other fees incurred

- Similar fee structure to investing with 3 REIT ETFs on a DIY-basis where total expense ratio is around 0.60%

Conclusion on REITs

- If you are already REITs heavy, look to pare down some of the lower quality "high-yield" REITs that might not survive Covid-19

- If you entered this health crisis underweight REITs, look to purchase quality blue-chip REITs at a discount.

- Regardless, REITs as an investment asset class in Singapore will continue to remain as an attractive passive income option

Disclaimer: This blog post's contents are from moneysense.gov.sg and newacademyoffinance.com