Real Estate Investment Trusts(REITs) seems to be quite an attractive investment asset this year, with dividend yields hovering about 6 to 7%.
For those who have seen our previous articles about the risks of investing in REITs and have decided that this investment instrument suits them, read on to find out about the 5 factors that you need to watch for finding an outperforming REIT.
Singapore REITs fall mostly into 6 broad categories, namely residential, industrial, office, retail, medical and hospitality.
Some REITS may focus just on a single type, while others may have a diversified portfolio of investments in a few of these industries. When investing in REITs, you should research on the outlook for the sector in that specific market.
For instance, will REITs focusing on office buildings prosper in Singapore, or are there strong competing markets in the neighbouring countries?
Will REITs focusing on healthcare facilities and medical suites gain popularity since we have an ageing population? Use these questions to drive your background research when choosing a REIT for investment.If you can’t make up your mind, how about investing in a REIT ETF?
The Singapore Exchange (SGX) has already launched a S-REIT 20 Index which is made up of 20 constituents that are diversified in property type and where these property assets are located.
Which currently it is simply an index, the SGX is planning to launch a similar REIT ETF sometime later this year, so do look out for that!
2) Quality Of Underlying Assets
Many investors only focus on the dividend yield when it comes to investing in REITs.
The problem is that at the end of the day, the assets are the ones that will give rise to capital gains in the future, so it is critical never to ignore the quality of these assets.
How do you assess these assets then?
Look at the cashflow and positioning of the assets to see if they are attractive and are logical. For example, building a huge retail mall in an emerging city in China could be a great strategy for the developer in the longer term.
You should also look out for the financial health of existing assets, like whether they have long-term contracts with key tenants and whether occupancy rates are high.
3) Management Quality
REITs operate somewhat similarly to Unit Trust and similarly, a REIT will appoint a manager to manage a pool of properties and get paid for a percentage of the revenue.
Most fees charged by REIT managers range from 5 to 10% of a REIT’s revenue and as we all know, these fees eat into investors’ dividends.
One of the major problems in REITs management is that sometimes, REIT managers may have a conflict with unit-holders since their incentives may come from acquiring more and more properties to produce higher revenue, but these additional properties may not be yield-accretive.
There is talk that the MAS wants to introduce more transparency with regards to REIT management fees, but until that happens, you’d probably need to go dig into the financial statements of each REIT you are interested in.
4) Dividend Yield
Last but not least, investors naturally look out for the dividend yield paid out by REITs but be aware that dividend yield should only be one of the few parameters you should look out for when analyzing REITs and not the sole criteria.
Also take note of the consistency of the REIT’s payout – is it stable and rising year-on-year or does it fluctuate?These 4 points are just at the tip of the iceberg when it comes to analyzing REITs, but it should be good enough to start you off on your research for your next passive income generator!