Singapore Real Estate Investment Trust is one of the favorite investments of Singaporeans and we can see why.
Given the faith we have in the Singapore economy as well as the property market here, S-REITs provide a lower entry barrier for those who cannot afford to buy another investment property.
They are also more liquid and provide a great way for dividend investing.
Why Invest In S-REITs?
1) Compared to REITs from other countries, investors here probably know the market best.
Although higher growth might be sought from emerging countries such as those in China and Myanmar, you have the higher risk factor, currency exchange risks as well as having lack of local knowledge to deal with.
We also know that Singapore is largely stable and the government has a strong hand in regulating the property market, which puts investors in safer hands.2) S-REITs provide relatively good yield rates in our low interest rate environment.
For one, S-REITS are given incentives by the government – a hefty 17% corporate tax exemption if they distribute 90% of its distributable income as dividends. This translates into higher yield rates for investors.
In fact, the average dividend yield rate for S-REITS is around 6.3%.
3) If you want to take exposure in the property sector in Singapore, there are other ways instead of just investing in REITS.
You can buy a physical property for investment and earn rental income or even partake in trading property stocks.
However, the former obviously requires deep pockets and property stocks may not pay out as much dividend as a REIT. In addition, the risks may be more concentrated as well.
Risks Associated With REITS
The risks associated with a REIT is not universal. Meaning to say that it varies from one to another, depending on factors involved such as the geographical location, sectors, leverage and refinancing risks.
Investors should not simply analyse a REIT purely by looking at the expected yield, but also consider quality and lease length of the properties held under trust.
Market Risk: Market risk refers to the fluctuation of returns caused by the macroeconomic factors, resulting in a lower returns for investors. This reflects investors’ sentiments about the general economic outlook or sector forecasts.
Income Risk: Most investors may buy into a REIT for dividend investing, but the distribution is not quite guaranteed if the REIT is suffering from an operating loss.
Sector/Concentration Risk: S-REITs fall broadly into 6 categories – office, residential, retail, healthcare, industrial and hospitality. Depending on the REIT you choose, they will be directly impacted by the performance of the industry.
For instance, the retail and office sector aren’t looking bright in Singapore, so you may want to consider REITs with lower concentration in these sectors.
Refinancing Risk: As S-REITs distribute at least 90% of their income, they may not be able to build up reserves to repay their outstanding loans.
This means that they would often require refinancing or use other capital market means such as bond issues to raise money. This can incur higher costs, resulting in diminished dividends.
As with any other investment product, investors should take time to understand the risks and rewards of REITs and consider if it is a suitable investment class for them.