REITs have become popular in recent years for expats due to them being a hands-off approach for investing in property with the requirement to provide 90% of income to shareholders and to ring-fence tax. They have the option of being more liquid than physical property and having the option of going into a commercial property. Although shares are seen as more volatile it is worth the risk for most expats for a hands-off approach.
A ‘REIT’, which is short for ‘Real Estate Investment Trust’ is a company that generally owns/operates/finances properties that are known to provide profits. REITs usually generate steady profits for investors. however, they are not as beneficial as other forms of investments such as stocks, which have more capital appreciation. Similar to the stocks, REITs are also publicly traded making them have a higher amount of liquidity. REITs invest in many types of properties such as apartments, hotels, medical facilities, retail centers, warehouses, data centers, cell towers, etc.
Terminology:
Distribution Per Unit (DPU) – Distribution Per Unit lets the investor have an idea about how much dividend is obtained by them based on the units of REITs they own.
DPU is calculated as total distribution divided by the number of shares.
Net Asset Value (NAV) – Net Asset Value is the representative value that a customer can get when a REIT gets liquidated of all its assets and clears the liabilities.
NAV per share is calculated as the market value of the assets minus the value of liabilities divided by the number of shares.
Revalued Net Asset Value (RNAV) – it is nothing but the net asset value, where the assets as well as liabilities are adjusted in order to reflect the current market values.
RNAV per share is calculated as the revised market value of the assets minus the revised value of liabilities divided by the number of shares
Gearing – Gearing is the term used to access the financial leverage of a REIT. Companies with high gearing are most highly unsafe during times of a recession as interest has to be paid to the investors regardless of the situation.
In case a REIT fails to pay the investor (wither principal or interest) in time, it might have to fold up. From the year 2015, the Monetary Authority of Singapore (MAS) has levied a gearing limit of 45% for all the REITs in Singapore.
The gearing ratio (debt ratio) is calculated as total debt divided by total assets.
Average Interest Rate – the average interest of a REIT is used to determine the expensiveness of a loan from a bank that the respective REIT borrows money from.
if the interest rate is higher, then the debt funding of the REIT is said to be more expensive.
It is estimated that Ascendas India Trust is known to have a high average interest rate as the interest rates in India are higher compared to most other countries.
Weighted Average Debt Maturity (WADM) – REITs are required to invest in properties intensively (in terms of capital). The debts of a REIT have their own tenure and maturity dates.
REITs usually roll over these debts when each existing debt getting matured. However, this process involves risk as the interest rate might be higher or some of the terms of the debt might be more difficult or require effort.
Adding to that, REITs might not be able to borrow the amount they actually intended to borrow.
This WADM presents an idea to the investor indicating the remaining debt. It is represented in years. Generally, a longer WADM is better than a shorter WADM as a huge amount of loans could be settled over the time period.
Weighted Lease Average Expiry (WALE) – Weighted Lease Average Expiry is the term used to represent the likelihood of REITs’ property portfolio getting vacant.
As we are already familiar with the aspect that a REIT generates income by leasing out properties. Therefore, occupancy will impact a REIT’s earnings and will result in a distribution loss.
Rental Reversion – Rental Reversion is used to calculate the changes in rental rates when an expiring lease gets renewed.
A positive rental reversion rate is beneficial for a REIT because it represents that new tenants are willing to higher rents compared to the existing rates.
Similar to this, negative rental reversion rates indicate oversupply or lack of demand in the rental markets.
Net Property Income (NPI) – This can be measured by deducting the maintenance costs, taxes, and operating expenses from the gross revenue of a REIT. It is considered one of the best methods to identify the performance of a REIT.
Capitalization Rate or Property Yield – The income yielding capability of a property is known as the Capitalization.
It is calculated by dividing the net operating income and property value.
Occupancy Rate – The occupancy rate measures the proportion of the lettable area, which is currently occupied by a tenant.
100% occupancy rate of a REIT means that the tenant has occupied the whole property and there is no more room for new tenants.
A lower occupancy rate indicates a less preferred location or lack of demand by a tenant.
Asset Enhancement Initiatives (AEI) – Asset Enhancement Initiatives include Refurbishment, Revamp, and upgrades required for a property.
The main objective of AEIs is to increase the value of a REIT’s asset value in order to optimize the rental income. This is a common thing to be observed in Singapore, especially when it comes to shopping malls.
Advantages and Disadvantages of REITs:
Most investors opt for buying REITs rather than opting for buying physical properties. Let us have a look at the pros and cons of REITs in contrast to physical properties.
Pros:
- People can get access to a higher amount of liquidity with the help of REITs. They can easily buy or sell REITs as REITs are traded similar to the stocks on the stock exchange.
- On the contrary, people who own property might find it hard to sell or buy their property as it requires a lot of time and effort.
- REITs require an amount as low as a few hundred from the people to get started. Whereas, investing in physical properties might require hundreds or thousands of dollars.
- People who own a physical property would have to deal with the issues and maintenance of their property. Moreover, they are also required to deal with the tenants by themselves.
- However, in the case of REITs, a person can be relieved of all these hassles. The property managers take care of the tenants and the maintenance as well.
- It is relatively easy for a person to buy a residential property, whereas, investing in commercial properties might require experience and expertise in that specific area.
- People who invest in commercial properties generally invest in office, retail, and industrial properties. Adding to that, buying certain properties might be very hard as they require a hefty sum of money.
- REITs, on the other hand, will let an investor invest in not only shopping malls, but other types of expensive properties such as hospitals and office buildings as well.
Cons:
- As REITs are traded on stock exchanges like stocks, the price fluctuations are laid open to the market volatility. Physical properties do not involve such fluctuations as they aren’t traded in this way.
- Even though the managers handle everything on an investor’s behalf, they charge management fees for the services offered. This would generally take a bite in the profits gained.
- Management fees are not only based on the value of the assets, but they are also applicable when a REIT owns property or disposes of it.
- REITs may only borrow up to 45% of a specific asset unlike a physical property, where a person can get a 60% – 80% loan to valuation ratio.
The management fees and the lower leverage won’t let a traditional REIT be able to beat the returns offered from property investment. However, it is a noteworthy point that the higher leverage involved in property investments makes them risky.
Any wrong step made by an investor while investing in a property can lead to serious damage to that specific person’s wealth.
Considering everything, REITs can be an easy investment option that involves a lower amount of risk. They also grant access to achieve a broad exposure to diversified portfolios of properties.
Types of REITs:
Coming to the types of REITs, there are:
- Retail REITs
- Office REITs
- Residential REITs
- Hospitality REITs
- Industrial REITs
- Healthcare REITs
Now, let us have a detailed look at each of these REITs individually in order to get a better idea.
Retail REITs
Probably, most of the shopping malls that people generally visit are owned by a retail REIT. Therefore, if you wish to make an investment in Retail REITs, you should evaluate the overall performance of the retail industry as it is the key factor to know about your future profits.
You should also pay attention to the fact that REITs generate profits by renting the property to the tenants. If any of the tenants were to face issues with the cash flow, they might find it difficult to pay the rent on time.
In some cases, there is even a possibility that the tenants might not be able to make a payment. In such situations, a REIT would have to find a replacement as quickly as possible, and this might not be possible sometimes. Therefore, while you make an investment in retail REITs, make sure that you choose a REIT that has a stable tenant. Along with making an analysis of the retail industry, you should also analyze the REIT.
It is recommended that you choose a REIT with strong balance sheets, durable profits, and a low amount of debt.
During troubled economic situations, retail REITs that have capital (which is handy) are able to buy real estate at lower prices. You should take advantage of this situation if you are a retail investor.
Office REITs
Office REITs are the type of REITs that concentrate on the building used for offices. The income generated by Office REITs is obtained from the rents of an office.
One of the major advantages that Office REITs have is that they tend to deal with leases in the long-term. If want to make an investment in Office REITs, here are some things that you might need to consider.
- Economic situation.
- Current unemployment rate.
- Job vacancies.
- The economic situation of the particular area in which the REIT has made an investment.
- The capital which is available for making an investment by the REIT.
- Office REITs are also observed as a sub-group of Industrial REITs.
Residential REITs
Residential REITs are the type of REITs that invest in properties such as housing, rental apartments, rental buildings, etc.
While you make an analysis of Residential REITs, you should find out that how many affordable homes are available in the specific area where the investment is made by the respective REIT.
If the home affordability is low, the number of people who are forced to rent will be high leading to an increase in the prices of rents. This is why most Residential REITs concentrate on highly developed urban areas.
Some other factors that should be considered are the population of that area and the job opportunities available. Cities that have a considerable amount of growth in the economy will attract people from other places while increasing the demand for rental properties.
Places having lower availability of homes along with having higher rents are the best suitable conditions for residential REITs.
Hospitality REITs
As the name suggests, the REITs that invest in properties belonging to the hospitality sector like hotels, service apartments, short-term lodging properties, or other accommodation providing facilities.
Even though it sounds attractive to be able to invest in hotels with the help of hospitality REITs, there are some major aspects that are needed to be taken into consideration.
First of all, you would have to know about the overall performance of the hospitality sector.
In case the economy is poor, the hospitality sector is anticipated to deal with lower sales and lower occupancies, specifically the hotels that are specialized for tourism purposes.
It is even better if you are able to have a look at the properties that are owned by a hospitality REIT and make an analysis of its occupancy rate on average. As the properties of hospitality REITs are based on short-term stays and leases, the overall performance can be highly volatile and be easily affected by economic movements.
Industrial REITs
Industrial REITs usually manage or own industrial properties, which are provided to tenants for rent. Some examples of the properties in which industrial REITs make an investment are warehouses, distribution centers, and specialized facilities.
It is important for you to consider these spaces and facilities owned by the REITs and make sure you gain some information about the industries or companies that are renting these spaces.
It should also be duly noted that each facility holds a massive space and when a tenant is lost, it may be presented as a major difficulty for the industrial REIT, especially for the ones having little assets.
Industrial REITs usually have short-term leases and leases ranging for 30 years are typical. In such conditions, the value of the property will depreciate at a faster pace and the investors are compensated with a higher amount of yields.
Healthcare REITs
Healthcare REITs make an investment in different types of medical facilities like hospitals, nursing homes, retirement facilities, and medical centers. The performance of healthcare REITs is based on the advancement of the healthcare system.
While making an investment in healthcare REITs, you should look for a diversified group of clients and the availability of a wide range of properties. You should also make sure that the REITs chosen by you have a considerable amount of experience.
REIT ETFs:
Along with the option of stocks, investors are also able to choose from individual REITs or a basket of REITs by making use of ETFs and make an investment in them.
ETFs are passive funds that try to obtain results by matching the performance of their underlying indices. There is an availability of 3 REIT ETFs that are listed on the Singapore Exchange (SGX) for the investors to choose from, they are ‘Lion-Phillip S-REIT ETF’, ‘NikkoAM-Straits Trading Asia Ex-Japan REIT ETF’, and ‘Phillip SGX APAC Dividend Leaders REIT ETF’.
