Complete guide to REITs Investing in Singapore [2024 Guide]

Investing in real estate, traditionally through buying and managing properties, has been a lucrative but capital-intensive and time-consuming endeavor. Many in Singapore grow up hearing stories of how life could have been better with just a few more investment properties. However, the barriers to entering the property market are high, with substantial capital required and extensive knowledge needed to succeed.

Enter Real Estate Investment Trusts (REITs), which have become a cornerstone of investment in Singapore, boasting the largest REIT market in Asia outside of Japan. With a market capitalization approaching S$100 billion and 41 REITs listed on the SGX, REITs provide an accessible avenue for investors to gain exposure to diverse property portfolios without the hassle of direct management or the burden of large capital commitments. REITs not only simplify real estate investment but also offer consistent dividend payouts, making them a valuable addition to any investment portfolio.

Whether you're an experienced investor or new to the scene, REITs offer a streamlined path to owning real estate, allowing you to invest in substantial assets that once seemed out of reach. This guide will introduce you to the fundamentals of REIT investing in Singapore, showing you how to participate in real estate with less capital and minimal direct involvement.

So what are REITs?

Real Estate Investment Trusts (REITs) are investment vehicles that are structured to own, operate, and finance income-generating real estate. They are publicly listed on stock exchanges, including the Singapore Exchange (SGX), making them accessible to investors in a manner similar to buying stocks. By pooling capital from a multitude of investors, REITs are able to acquire diverse property portfolios which are professionally managed and leased out to generate rental income. This income is then distributed to investors typically on a quarterly or semi-annual basis.

In Singapore, REITs must adhere to stringent regulatory requirements to ensure stability and protect investors. These include:

• distributing over 90% of taxable income to shareholders annually
• maintaining a gearing (debt to asset ratio) of less than 50%
• and limiting property development investment to a maximum of 25% of their total asset value.

The organizational structure of a REIT includes several key roles:

• Property Manager: Responsible for the day-to-day operations, such as collecting rents and maintaining high occupancy through effective property management strategies.
• REIT Manager (or Trust Manager): Sets the strategic direction of the trust, decides on asset acquisitions and sales, and oversees large-scale asset enhancements.
• REIT Sponsor: Usually a major property developer that establishes the REIT and often remains integrally involved by holding stakes in both property and trust management.
• Trustee: Holds the REIT’s assets on behalf of the unit holders and ensures compliance with the trust deed and regulatory guidelines.

This structure allows investors to gain exposure to real estate markets without the complexities of direct property management.

9 Types of REITs listed in Singapore

In Singapore, Real Estate Investment Trusts (REITs) offer investors the opportunity to diversify across various types of real estate through a single investment. Here's an overview of the different types of REITs available in Singapore, each catering to specific segments of the property market:

1. Retail REITs

These trusts invest in shopping malls and retail outlets. Given the direct correlation with consumer spending, the performance of retail REITs often reflects the economic climate and consumer health. Investors should look for REITs with stable anchor tenants and those that can manage turnover effectively, especially during economic downturns when discretionary spending may wane.

*Dasin Retail Trust is a Property Trust

Source: REITAS

2. Office REITs

Focused on commercial spaces and office buildings, these REITs benefit from long-term leases which provide a steady income stream. Key factors affecting their performance include local employment rates, economic conditions, and corporate growth, as these influence demand for office space.

Source: REITAS

3. Industrial REITs

This category includes warehouses, distribution centers, and manufacturing facilities. Industrial REITs are often influenced by global and local economic trends, the state of the logistics sector, and manufacturing output. They may offer higher yields due to potentially shorter lease durations and the necessity for less frequent renovations compared to office spaces.

Source: REITAS

4. Hospitality REITs

Investing in hotels, resorts, and other short-term accommodation properties, hospitality REITs are highly sensitive to factors like tourism trends, global economic health, and regional stability. Their performance can fluctuate significantly based on seasonal and economic cycles.

Source: REITAS

5. Healthcare REITs

These REITs invest in hospitals, nursing homes, and other healthcare facilities. The demand for healthcare services tends to be more stable, which may provide a defensive hedge during economic downturns. Factors like demographic trends toward an aging population can drive long-term demand in this sector.

Source: REITAS

6. Diversified REITs

Diversified REITs own and manage a varied portfolio that includes multiple types of properties such as office spaces, retail locations, residential units, and sometimes industrial facilities. This variety allows them to mitigate risks associated with economic fluctuations in any single market sector, offering investors a more stable income stream and reduced volatility compared to sector-specific REITs. By spreading investments across different property types, diversified REITs provide a balanced approach to real estate investment, capitalizing on the strengths of various sectors.

*CapitaLand India Trust is a Property Trust.

Source: REITAS

7. Data Centre REITs

A newer and increasingly relevant category, these REITs focus on facilities that house critical IT infrastructure for businesses. The burgeoning demand for data storage driven by digital transformation and cloud computing boosts the prospects for this sector.

Source: REITAS

8. Residential REITs

Currently, Singapore does not have any residential REITs or stapled securities listed on its exchanges. The last residential REIT available in Singapore, Saizen REIT which focused on Japanese properties, was delisted in October 2017.

8. REITs ETFs

For those seeking simplified exposure to the REITs market, there are 5 REITs Exchange-Traded Funds (ETFs) listed in Singapore that aggregate multiple REIT investments into a single traded entity, offering diversification and reducing the need for individual selection and management. If you want to know more about choosing the best REITs ETFs, read our complete guide.

Source: REITAS

Each type of REIT has its own set of risks and opportunities based on its underlying assets and market conditions. Investors should consider these factors alongside their own financial goals and risk tolerance when evaluating potential REIT investments. The strategic management of the properties, the quality of tenancies, and the strength of the REIT management team are also critical components to consider for long-term value creation and income stability.

Why Invest in REITs: Benefits & Considerations

Investing in Real Estate Investment Trusts (REITs) offers a strategic avenue for those seeking exposure to the real estate sector without the direct challenges of property management. Here’s a streamlined analysis contrasting REITs with physical property investments:

Strategic Advantages of REITs:

• Diversification: REITs provide access to a broad array of real estate sectors including commercial, residential, industrial, and healthcare properties. This diversity helps mitigate risks associated with economic downturns in any single market.
• Liquidity: Unlike physical properties, REITs can be bought and sold on stock exchanges, offering the flexibility to adjust holdings in response to market changes.
• Professional Management: Investors benefit from professional management teams who handle all operational aspects, from tenant management to property maintenance, thereby removing the day-to-day burdens from the investor.
• Accessibility: With REITs, entry can be achieved with significantly lower capital compared to purchasing physical properties. This makes real estate investment feasible for a broader range of investors.

Comparing REITs vs. Physical Properties

Here’s How to Start Investing in REITs

Investing in Real Estate Investment Trusts (REITs) on the Singapore Exchange (SGX) requires setting up the appropriate accounts to facilitate your transactions. Here's a step-by-step guide on how to start investing in REITs:

1. Opening a Brokerage Account: To buy and sell REITs, you first need to open a stock brokerage account. This can be done by visiting the websites of various brokerage firms and applying online. Each brokerage will offer different features, fees, and levels of customer service, so it's wise to compare options to find the best fit for your investment strategy.
2. Setting Up a Central Depository (CDP) Account: A CDP account is essential for trading on the SGX as it holds the stocks and REITs you purchase in electronic form. If this is your first time setting up a CDP account, most brokers will assist you in completing and submitting the necessary application form to the Central Depository. This helps streamline the process and saves you the hassle of direct application.
3. Option for a Custodial Account: Alternatively, you may opt for a custodial account managed by your brokerage if you prefer not to open a CDP account directly. This arrangement means the broker holds the securities on your behalf. While this might reduce some administrative tasks, be aware of any additional costs or limitations associated with custodial services.
4. Completing the Application: Whether for a CDP or custodial account, the application process can be completed online, making it convenient to set up from home. After submitting your application and all necessary documents, the CDP or your brokerage will process the information and notify you once everything is set up, providing you with login details or further instructions.
5. Investing in REITs: Once your accounts are active, investing in REITs is as straightforward as trading stocks. You can buy and sell REIT shares through your brokerage account, managing your investments directly from your computer or mobile device. REITs are attractive to many investors due to their regular dividend payouts, which are typically distributed quarterly or semi-annually and can be a stable source of income. These dividends can be reinvested to grow your REIT holdings or used as supplemental income, depending on your financial goals.

For investors interested in a more diversified approach to gaining exposure to Singapore REITs, StashAway's Income Portfolio presents an appealing option. This is StashAway’s first SGD-denominated and SGX-traded portfolio, designed to cater to both retail and accredited investors. The portfolio includes a mix of six SGX-listed ETFs, encompassing a range of asset classes such as SGD-denominated government bonds, agency bonds, investment-grade corporate bonds, real estate investment trusts (REITs), and dividend-focused equities.

This allows investors to benefit from the stability and income potential of bonds while also gaining exposure to the real estate and equity markets through REITs and dividend stocks. Such a mix aims to balance risk and return, making it suitable for investors looking for steady income with a moderate risk profile. This type of investment might be particularly attractive for those who prefer a hands-off approach, as it offers broad market exposure without the need to manage individual securities.

How to Select the Best REITs to Invest In

When selecting the best REITs to invest in, several critical criteria should be considered to ensure you're making a sound investment. Beyond the quality of the REIT properties, tenant mix, and weighted average lease expiry (WALE), other factors to consider include:

1. Financial Performance: Evaluate key financial metrics such as Funds from Operations (FFO), Adjusted Funds from Operations (AFFO), and Net Asset Value (NAV). These indicators help assess the REIT's profitability, cash flow stability, and overall financial health. FFO and AFFO provide insights into the cash flow generated from operations, crucial for maintaining and growing dividends. NAV reflects the total value of the properties minus liabilities, offering a snapshot of the REIT's underlying value.
2. Distribution Yield and Payout Ratio: The distribution yield is a critical factor as it indicates the income potential of the REIT. However, it's important to balance yield with the payout ratio—the percentage of income distributed as dividends. A high payout ratio may not be sustainable unless backed by robust cash flows.
3. Gearing Ratio: This measures the level of a REIT’s debt relative to its total assets. A lower gearing ratio suggests less risk as the REIT is not overly reliant on debt to finance its operations and growth. Regulatory caps often dictate maximum allowable gearing levels, which in many markets is around 45%.
4. Interest Coverage Ratio: This ratio indicates how easily a REIT can pay interest on its outstanding debt with its operating income. A higher interest coverage ratio is preferable as it implies that the REIT can comfortably meet its debt obligations without stressing its finances.
5. Capital Management: Efficient capital management strategies, including how a REIT manages its refinancing, capital raisings, and debt maturity profiles, are vital for long-term stability and growth. Effective capital management can enhance a REIT's ability to expand its portfolio and increase returns to shareholders.
6. Economic and Sectoral Trends: Understanding broader economic and specific sector trends can significantly influence REIT performance. For instance, industrial REITs may benefit from e-commerce growth, while retail REITs might be vulnerable to the same trend.
7. Regulatory Environment: Being aware of the regulatory landscape in the REIT's operating regions is crucial. Changes in tax legislation, zoning laws, and rental policies can all impact REIT operations and profitability.

Each of these criteria can help you make a more informed decision about which REITs might best fit your investment goals and risk tolerance. By conducting thorough due diligence and possibly consulting with financial experts, you can better navigate the complexities of REIT investments.

Should We Consider Investing in Singapore REITs?

The iEdge S-REIT Index, which tracks the performance of Singapore REITs, offers an indicative dividend yield of 5.6%. This is a strong yield especially when compared to other conservative investment options available in Singapore:

• Singapore Savings Bonds (SSB), Singapore Government Securities (SGS) Bonds, and Treasury Bills (T-Bills) typically provide an average return of around 3%. These are government-backed securities known for their low risk, but the yield is significantly lower than what you might expect from S-REITs.
• Fixed deposits currently offer up to 3.35% in terms of returns, which is the highest among traditional bank savings products. While slightly higher than SSBs and T-Bills, these too fall short of the yield provided by S-REITs.

Given these comparisons, S-REITs stand out as a relatively attractive option for those looking to earn higher income from their investments, albeit with a higher risk profile compared to bonds and fixed deposits. S-REITs offer a practical solution for investors seeking both income generation and a moderate level of exposure to the real estate market, all while maintaining liquidity that is not typically available with direct property investments.

Strategic Investment in Real Estate

REITs offer a strategic and accessible avenue for investing in real estate within Singapore, presenting a viable option for those looking to diversify their investment portfolios without the heavy capital requirements and management responsibilities typically associated with direct property ownership. With a robust regulatory framework ensuring investor protection and stable returns, coupled with a diverse range of property sectors available through various REITs, investors can engage in the real estate market with more ease and confidence. 

As with any investment, due diligence is crucial, and investors should consider factors such as dividend yields, financial health, and market conditions when selecting REITs to ensure they align with their long-term financial goals. By doing so, REITs can serve as a valuable component of a well-rounded investment portfolio, providing potential for steady income and capital appreciation.