Complete Guide To The Motley Fool Singapore's - Buying The Best Singapore REITs
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BROUGHT TO YOU BY THE MOTLEY FOOL SINGAPORE The Motley Fool Singapore’s Complete Guide To Buying The Best Singapore REITs
All information is provided exclusively by The Motley Fool Singapore Pte Ltd, a licenced
investment advisory research provider (MAS Financial Adviser’s Licence No. FA100056-1). Any
information, commentary, recommendations or statements of opinion provided here are for
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be sure actions are in line with your investment objectives, financial situation and particular needs.
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or local taxes or restrictions. The information contained in this publication are obtained from, or
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All performance information was current as of the date each article was originally published,
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Disclosure: The following disclosure is accurate as of the time of publication (5 September 2018).
Chin Hui Leong owns shares in Berkshire Hathaway B, CapitaLand Mall Trust, Frasers Centrepoint
Trust, Mapletree Logistics Trust, Parkway Life REIT, Singapore Exchange and Suntec REIT. Chong Ser
Jing owns shares in Berkshire Hathaway B, Frasers Commercial Trust, Mapletree Commercial Trust,
Mapletree Industrial Trust and Mapletree Logistics Trust. David Kuo owns shares in Ascott Residence
Trust, CapitaLand Commercial Trust, CapitaLand Retail China Trust, CapitaLand Mall Trust, First
REIT, Frasers Centrepoint Trust, Keppel REIT, Mapletree Commercial Trust, Mapletree Industrial Trust,
Parkway Life REIT, Singapore Exchange Limited and Starhill Global REIT. Jeremy Chia owns shares in
Berkshire Hathaway B, EC World REIT, First REIT and Keppel REIT. Sudhan owns shares in CapitaLand
Commercial Trust, CapitaLand Mall Trust and Singapore Exchange Limited. The Motley Fool Singapore
has recommendations on Ascott Residence Trust, CapitaLand Commercial Trust, CapitaLand Mall
Trust, CapitaLand Retail China Trust, First REIT, Frasers Centrepoint Trust, Mapletree Commercial Trust,
Mapletree Industrial Trust, Parkway Life REIT and Singapore Exchange Ltd.
Visit us online at www.Fool.sg
2 The Motley Fool Special Report fool.sg
Table of Contents
Introduction
What Are REITs?
• 5 Facts About Singapore-Listed REITs
• 5 Largest REITs in the Singapore Stock Market
REITs Versus Investing in Other Instruments
• Do You Know the Difference Between REITs, Property Trusts, and Stapled Securities?
• The Pros and Cons of Investing in REITs
• 8 Differences Between Investing in REITs and Physical Properties
• Why I Invest in REITs Over Treasuries and Corporate Bonds
S-REIT Regulations
• New REIT Regulations: What Investors Need to Know
REIT Structure
• What Investors Should Know About a Typical REIT Structure Using Frasers Centrepoint Trust as
an Example
Different Type of REITs Available
• 8 Different Types of REITs and Stapled Trusts Listed in Singapore
REIT Financial Statements
• How to Choose the Best REITs to Invest In?
REIT Valuation
• Valuing REITs: A Quick Primer
Choosing the Best REITs
• 3 Factors to Consider When Investing in REITs
• How to Identify REITs That Have a Portfolio That Can Appreciate in Value
• How to Sieve out the Best REITs from the Rest?
• 3 Factors to Consider When Analysing a REIT
Types of REITs to Avoid
• 4 Types of REITs to Avoid
• Three Red Flags When Investing in REITs
Risks When Investing in REITs
• Why You Shouldn’t Invest in REITs
• 3 Big Risks Investors Must Know About A Real Estate Investment Trust
REIT Exchange-Traded Funds (ETFs)
• REIT ETFs Listed in Singapore: 5 Quick Points of Comparison
• What Investors Should Know About Lion-Phillip S-REIT ETF
Commonly Used Terms in REITs Investing
• REIT Jargon Demystified: Commonly-Used Terms That REIT Investors Should Know
Bonus Contents
• REIT Investing Made Simple: A Checklist to Pick Out the Best REITs
• Are REITs Worth Considering When Rates Rise?
• 2 REITs To Buy for Your Parents
• 2 REITs That Have Increased Their Distribution Per Unit for Five Consecutive Years
• 3 Ways REITs Can Grow Their Distributions
• 2 REITs That Give Exposure to the Fast-Growing China Property Market
fool.sg Special Report The Motley Fool 3
Introduction
Dear fellow investors,
Real estate investment trusts, or REITs as they’re commonly known, are really popular
among investors in Singapore’s stock market. There’s a good reason for that. REITs
generally have high distribution yields and can thus provide a steady stream of passive
income for investors.
But, with over 40 REITs in Singapore’s stock market right now, navigating through
them can be a tricky affair. Besides, a REIT need not necessarily be a good investment
just because it has a high distribution yield. It’s for these reasons and more, that we, at The
Motley Fool Singapore, have been writing and publishing many articles on REITs at our
flagship website, Fool.sg, over the years.
In this complete Singapore REITs (S-REITs) guide, we have compiled all the best REIT-
related articles on Fool.sg. These articles touch on a wide range of topics, from the basics of
REITs, to the risks involved when investing in them.
So, sit back, and enjoy the Foolish guide we have compiled just for you. We hope you’ll
be a much savvier – and richer – REIT investor after reading our carefully-prepared guide.
Fool on!
The Motley Fool Singapore
September 2018
4 The Motley Fool Special Report fool.sgWhat Are REITs?
5 Facts About Singapore-Listed REITs
Jeremy Chia | December 21, 2017
Singaporeans love to invest in real estate. It is, 5) 3 REIT listings in Singapore this
therefore, no surprise that real estate investment
trusts (REITs) have been a popular investment year
vehicle in Singapore since its debut in 2002. Without There were a total of three new REITs that listed
further ado, here are five interesting facts about in Singapore this year. The strong performance of
REITs in Singapore. REITs in Singapore in the past and the attention it
garners from Singaporean investors have been key to
1) Singapore is the second largest attracting listings in Singapore.
REIT market in Asia The Foolish bottom line
Singapore has been a popular destination for REIT Investing in REITs in Singapore has rewarded
listings. Since its debut in 2002, the Singapore REIT shareholders handsomely in recent years. This year
market has grown to become the second largest REIT was an exceptionally good year for REITs as more
market in Asia, behind Japan. investors gained confidence in the property market
2) There are a total of 44 REITs
and property-related trusts and
securities in Singapore
There have been numerous REIT and property
related trusts listing each year. The total tally now
stands at 44. They each offer their unique value
proposition and area of specialty, giving investors a
variety of options to choose from.
3) There are 3 REIT ETFs in
Singapore
REIT exchange-traded funds (ETFs) track the
performance of a group of REITs, giving investors
exposure to a larger portfolio of properties.
4) REITs have outperformed the
Straits Times Index in recent years
A widely-used Singapore REIT index, which
consists of the 20 largest and most traded REITs in
Singapore, delivered 11.1% annually for the past
five years. The Straits Times Index (SGX: ^STI),
on the other hand, only returned 5.6% annually
during the same period.
fool.sg Special Report The Motley Fool 5What Are REITs?
5 Largest REITs in the Singapore Stock Market
Sudhan P. | April 6, 2018
Real estate investment trusts (REITs) are popular fall in distribution per unit (DPU) to 8.66
among Singaporeans. REITs are obliged to distribute cents for the full year ended 31 December
at least 90% of their taxable income to enjoy tax 2017. The fall was despite gross revenue for
benefits. Therefore, by investing in REITs, investors the year growing 13% to S$337.5 million and
can receive regular distributions, usually on a NPI going up 14.8% to S$265.5 million. An
quarterly basis. enlarged units base, which arose due to a rights
According to a recent report by Singapore issue in October 2017 to partially fund the
Exchange Limited (SGX: S68), Singapore’s five acquisition of the retail and office components
largest REITs (in terms of market capitalisation) of Asia Square Tower 2, took a significant toll
have a distribution yield of 5.6% on average. This is on the REIT’s DPU.
higher than the yield of the SPDR STI ETF (SGX: 4. Next in line is a diversified REIT, Suntec
ES3), which can be taken as a proxy to the Straits Real Estate Investment Trust (SGX: T82U),
Times Index (SGX: ^STI), at 3%. (Note: All market which owns both retail and office properties.
capitalisation and distribution yield data are as at 4 For the full year ended 31 December 2017,
April 2018.) gross revenue grew 7.8% year-on-year to
With that, let’s look at those five REITs and their S$354.2 million while NPI went up by 8.9% to
latest financial performance: S$244.5 million. The improvements were due
to the contribution from Australia’s 177 Pacific
1. With a market capitalisation of S$7.62 billion Highway, which was partially offset by lower
and topping the list is Ascendas Real Estate retail. The REIT has a market capitalisation of
Investment Trust (SGX: A17U), an industrial S$4.95 billion.
REIT. In the third quarter ended 31 December
2017, the REIT saw its gross revenue grow by 5. Last but not the least, Mapletree Commercial
4.1% year-on-year to S$217.3 million while its Trust (SGX: N2IU) takes the final spot with
net property income (NPI) rose 1.7% to S$157.6 a market capitalisation of S$4.55 billion. The
million. However, its distribution per unit (DPU) REIT, which has stakes in five office and retail
slipped 0.6% to 3.97 cents. assets in Singapore, saw its gross revenue for
the third quarter growing 0.8% year-on-year
2. Next on the list is retail REIT, CapitaLand to S$109.7 million. Meanwhile, NPI improved
Mall Trust (SGX: C38U). For the full year 1.9% to S$86.0 million. The REIT attributed
ended 31 December 2017, gross revenue the increases to higher contributions from
tumbled 1.1% year-on-year to S$682.5 VivoCity and Mapletree Business City I.
million while NPI slipped 0.3% to S$478.2
million. The declines were mainly due to the
non-contribution of Funan, which was closed
in July 2016 for redevelopment. Despite the
falls, 2017’s DPU inched up 0.3% to 11.16
cents. CapitaLand Mall Trust has a market
capitalisation of S$7.27 billion.
3. Coming in third and sporting a market
capitalisation of S$6.54 billion is CapitaLand
Commercial Trust (SGX: C61U). The
commercial REIT posted a 4.6% year-on-year
6 The Motley Fool Special Report fool.sgREITs Versus Investing in Other Instruments
Do You Know the Difference Between REITs, Property Trusts,
and Stapled Securities?
Jeremy Chia | December 27, 2017
Most of you have likely heard of real estate limits that are placed on REITs. Because of fewer
investment trusts, or REITs. But, do you know that restrictions, they do not receive the same tax benefits
there are also two other kinds of investment vehicles that REITs enjoy.
in Singapore’s stock market that are commonly
mistaken for REITs? These are property trusts and The lowdown on stapled securities
stapled securities. Stapled securities are listed property securities that
The two investment vehicles are similar to REITs in are a bundled combination of either REITs, property
many ways – even seasoned investors occasionally use investment companies, property trusts, or business
the three terms interchangeably. It is important to note trusts. This occurs when the investment vehicle wants
though, that there are fundamental differences between to apply a REIT model to a portion of its property
REITs, property trusts, and stapled securities. portfolio, but not to others. As such, only that part
of the property portfolio will be bounded by REIT
As investors, it is important that we are familiar
regulations and enjoy the associated tax benefits.
with these differences so that we can make informed
decisions. With that, here are the important Likewise, stapled trusts are obligated to pay the
differences between the three types of investment required distributions to their unitholders only for the
vehicles that you should be aware of. properties that are bound by the REIT structure.
The lowdown on REITs The Foolish bottom line
REITs are collective property investment trusts REITs, property trusts, and stapled securities, though
that pool money to invest in properties. Investors can similar, are actually bound by different regulations and
purchase units of a REIT through the stock exchange. consequently have their pros and cons.
But what makes a REIT different from a company As investors, we cannot oversimplify the
that invests in properties? Well, for one, a REIT is investment process by lumping all of them together.
bounded by more restrictions and regulations. They have their own risk-reward profile and can offer
In Singapore, REITs must pay out at least 90% of investors different value propositions. Hopefully, this
their distributable income to unitholders each year. article helps clarify the differences between the three
They are also limited to a maximum gearing ratio of and allows you to make more informed investment
45%. The restrictions can hinder a REIT’s business, decisions in the future.
but they do come with some benefits. For instance,
REITs enjoy favourable tax treatments compared to
other types of companies.
The lowdown on property trusts
Like REITs, property trusts also pool money to
invest in property. Investors can also buy units of
these trusts on the stock exchange.
The key difference between a property trust and
a REIT is that the former has no restrictions on the
amount it must distribute to its unitholders. Property
trusts are free to reinvest their money in any way
they wish. They are also not subjected to leverage
fool.sg Special Report The Motley Fool 7REITs Versus Investing in Other Instruments
The Pros and Cons of Investing in REITs
Jeremy Chia | December 12, 2017
Unsure whether to invest in real estate investment Key disadvantages as compared to stocks
trusts (REITs) or stocks? Well, before you make • Highly leveraged
a decision, it is important that you know the
differences between the two. REITs are usually highly leveraged investment
vehicles. This works as a double-edged sword.
In this article, I will run through some of the pros Leveraging allows REITs to purchase more assets
and cons of investing in REITs and stocks. than they have in unitholders’ equity. At the same
time, leverage poses additional risks as REITs
Key advantages as compared may face difficulty paying off its debt in difficult
to stocks times. As such, investors need to find REIT
• Predictable cash flow and dividends investments that have lower leverage to survive
through any exigencies.
Because REITs are required to give out 90% of
their income as dividends, investors should be • Unable to reinvest and grow
fairly certain that they would consistently get The fact that REITs are required to pay out 90%
dividends as long as the REIT continues to be of their income to unitholders works as a double-
profitable. REITs also tend to sign long-term edged sword too. Although unit holders can sleep
leases with their tenants. Because of this, easy knowing they can earn consistent dividends,
investors are able to predict the long-term REITs are not able to reinvest in their portfolio,
revenue of a REIT accurately. hence can remain stagnant for many years. The
• History of outperforming the market index two ways to grow are through issuing new units
that will dilute current unitholders’ equity or by
In the last five years, Singapore REITs as a increasing its borrowings from banks.
whole have returned more than the Straits
Times Index (SGX: ^STI). Even in the • Concentration risk
United States, REITs have had a history of Naturally, REITs, because of their focus on
outperforming the S&P 500, Dow Jones properties, will be affected when the property
Industrials and NASDAQ Composite indexes. market faces a downturn.
• REIT prices are less volatile
The Foolish bottom line
The beta of REITs, a measure of volatility, and
REITs and stocks can be good long-term
consequently, risk, has been historically much
investment vehicles for investors. However, knowing
lower than stocks at most times. This is because
the pros and cons of each instrument is important for
of the relatively predictable nature of REITs’ cash
investors who are deciding between the two.
flows and business.
• There are many types of REITs to choose from
There are 32 REITs to choose from in Singapore
that can be further divided into different
categories. These include healthcare, residential,
commercial, retail and mixed REITs. Investors
who are looking for overseas exposure also have
the option of choosing REITs that have a portfolio
of properties located outside of Singapore.
8 The Motley Fool Special Report fool.sgREITs Versus Investing in Other Instruments
8 Differences Between Investing in REITs and Physical Properties
Stanley Lim Peir Shenq, CFA | December 2017
If you are reading this, you may wonder, ‘How can its down payment, renovation costs, legal fees and
I be the next Li Ka Shing or Donald Trump when stamp duties. Let’s assume that 10% down payment
I’m just a wage earner?’ Or, perhaps, you may have is required. The legal fees and stamp duties work
accumulated some savings, and you are contemplating, out to be 5% of the property price. Thus, if the small
‘Should I start investing in a small apartment for rental apartment costs $300,000, you may need to prepare
income or build a portfolio of real estate investment a minimum of $45,000 in upfront capital to consider
trusts (REITs) that generate high dividend yields?’ the purchase. In fact, you need to prepare more as
In this article, I will share eight key differences you may need to do some minor renovation and
between investing in the two. From this, I believe service your mortgage.
it would help you to decide which of the two you What about REITs? You can start investing in REITs
should go for. with just a few hundred dollars. Of course, that is not
advisable as the transaction costs are relatively high.
Loan Eligibility It is best to invest a minimum of $3,000 to make the
This varies between banks and the country of your investment more meaningful and worthwhile. Thus, if
residence. In general, you should maintain a good you do not have much capital to start with, you may
credit score at all times so that you can qualify to consider REITs as an investment option.
get a loan to buy properties. If you are currently
eligible for a mortgage, perhaps, you should invest in Liquidity
physical properties. However, if you are not eligible Selling a physical property could be a major
for mortgages, then, your best alternative may be to decision for you. You may have to advertise and
invest in REITs. negotiate to find the right buyer who offers a good
price for your property. The whole process could take
Growth months or even years before the sale of your property
How fast are you able to grow your investment is concluded.
portfolio? Well, it depends on your financial status It is different for REITs as you can buy and sell
which impacts the maximum amount of mortgage REITs like any stock listed on the stock exchange
that you can qualify for. If you intend to borrow with just a few clicks of the button. There is usually
more, then, you need to grow your income. Thus, the always a ready buyer and a ready seller who is
ability to grow your portfolio of physical properties willing to buy your units in REITs. Here, there are no
is dependent on your ability to grow your income. advertisements, negotiations and real property gain
However, this is not the case for REITs. They tax to be incurred from the disposal of your REITs.
usually have stronger financial positions compared Thus, REITs are more liquid as the process of buying
to any individual on the street. Hence, they are more and selling the units are easier and convenient than
efficient and more capable of raising funds from banks physical properties.
and new investors to finance their acquisition of new
properties, thus, growing their portfolios. As such, Quality of Tenants
the portfolio growth in REITs is dependent on their If you invest in REITs, you will derive income
financial positions, not yours as individual investors. from a pool of commercial tenants. These tenants
vary according to the type of REITs you choose.
Capital For instance, if you buy a retail REIT, you would
If you are planning to buy a small apartment, you expect to receive income from retailers. If you buy
may need to prepare a sum of capital which includes
fool.sg Special Report The Motley Fool 9hospitality-based REITs, you would expect income capital gains if their prices appreciate. It is similar
from the operations of hotels. to investing in physical properties where you
When you buy REITs, the quality of tenants is receive rental income and enjoy long-term capital
usually far more superior than one individual who appreciation.
intends to occupy your apartment. This is because The difference lies in their tax treatment. Once
they typically have stronger financial positions, again, their treatment would differ according to your
a brand and a reputation to protect. Thus, there is country of residence.
lesser risk of rental default from commercial tenants For instance, you may not need to pay income
as compared to tenants we get from renting out tax on distributions received from REITs. However,
properties. you would most likely pay income tax on rental
income from your small apartment. Hence, it is wise
Lease Periods to consider tax issues before you venture into any
Lease tenure varies according to the type of investment.
properties. For instance, it is common for retail
leases to be around three years. Meanwhile, leases The Foolish Takeaway
to the hotel and hospital operators have a duration of Should you go for a small apartment or build a
10 – 20 years. REIT portfolio? Once again, it depends on your
If you intend to rent out a small apartment, the personality, financial standing, and investment
tenancy agreement is usually for a shorter period. motives. It is prudent to explore and evaluate the pros
The duration may vary between six, 12 or 24 months, and cons of each investment vehicle before investing
subject to the common practices of the rental market to make prudent investment decisions.
in a country. The continuity of your rental income
depends on your ability to attract, retain and collect
money from your respective tenant for as long as you
possibly can.
Would you like to receive uninterrupted income
consistently from making a one-time investment in
a REIT over the next five, 10 or 20 years, or worry
about fluctuations in your rental income?
Management
I believe there are two main objectives of property
management. Firstly, it is about collecting money
from tenants as much and as efficiently as possible.
Secondly, it is about enhancing the value of the
property over the long-term. It involves continuous
maintenance of properties – from minor repairs to
major renovations and refurbishments.
If you invest in a small apartment, then, it may
certainly be helpful to have a reliable handyman or
a contractor to assist you in this area if you wish to
delegate. If you invest in REITs, you are relying on
the professional expertise of the appointed property
managers to carry out a good job to manage the
properties within the portfolio.
Tax Issues
If you invest in REITs, you will receive
distributions as a form of passive income and enjoy
10 The Motley Fool Special Report fool.sgREITs Versus Investing in Other Instruments
Why I Invest in REITs Over Treasuries and Corporate Bonds
Jeremy Chia | April 30, 2018
With interest rates set to rise this year and REITs Limited downside risks
having generally richer valuations compared to last
annum, many investors may be tempted to switch As with any publicly traded security, REITs are
from REITs to historically safer assets such as susceptible to volatility and changes in prices.
treasuries or corporate bonds. Distributions per unit may also decrease over time.
However, the long-term trend of REITs in Singapore
However, I feel that switching from REITs to bonds suggests that REITs are unlikely to underperform
may end up dragging your investment returns over for extended periods.
the longer term – even as interest rates rise. Don’t
get me wrong, I absolutely agree that treasuries and REITs in Singapore need to maintain a gearing ratio
corporate bonds are perhaps safer options than REITs. of 45%. Because of that, REIT managers, no matter
Bonds and treasuries have a stable coupon rate and how gung-ho, have to keep their balance sheet in check
the principal (if held to maturity) is more secured for the authorities. Although it may limit their growth,
than REITs. The rising interest rate environment will it means that they are unlikely to face liquidity issues.
also increase the yield on both bonds and treasuries, Real estate also tends to have a much more
while it will be a drag to a REIT’s profitability due to a consistent and stable income stream than companies.
generally higher interest expense. This means that volatility in REIT prices have
Having said that, I believe REITs still possess historically been much lower than traditional stocks.
much greater long-term potential than both treasuries
and bonds. REITs generally have a higher yield, and
Distributions growth
the property market — despite its cyclical nature Finally, and perhaps the most appealing aspect
— historically always ends up outperforming bonds about REITs, is the fact that REITs, unlike bonds are
and treasuries over the long term. So here are three able to grow its distributions each year. If a REIT
reasons why I will still choose REITs over other manages its capital well and is able to improve the
income-producing assets. yield on its properties, they can grow its distributable
income, rewarding shareholders in the process.
Higher yields For instance, some REITs listed in Singapore have
REIT prices in Singapore surged last year, as most grown its DPU by 6-7% a year. That means that
investors were bullish about the property market. in 10-12 years, its DPU would have doubled. If an
However, even at these prices, REITs still offer unit investor had initially purchased the REIT at a yield
holders a much higher yield than most bonds and of 6%, he would be enjoying a 12% yield on his
treasuries. At the time of writing, the lowest yielding investment. This is a huge upside that REITs have
REIT has a distribution yield of 4.67%, while the over bonds and treasuries, which have a fixed rate
highest is yielding 8.71%. throughout their lifespan.
The 30-year government bonds are 2.9%, while
one-year treasury bills have a yield of just 1.59%.
The Foolish bottom line
High yielding corporate bonds have a coupon rate of As an investor, I am personally always looking
3 to 5.3%. Even perpetuities, where investors do not for the best risk-reward investments. As shown from
get their principal back, have a yield of just 6%. above, I think REITs undoubtedly have a much larger
reward profile than bonds and treasuries. Furthermore,
You may be wondering how sustainable REIT’s
the limited downside risk makes them a relatively safe
yields are. Well, REITs in Singapore have historically
investment. I am confident in saying that investors
performed very well. Properties also tend to grow in
who choose REITs over bonds will most likely feel
value, meaning the REITs book value will increase
very happy about their decision over the long term.
over time. This makes it an even more attractive
proposition for investors.
fool.sg Special Report The Motley Fool 11S-REIT regulations
New REIT Regulations: What Investors Need to Know
Chong Ser Jing | July 3, 2015
Yesterday evening, the Monetary Authority of Think about it this way. Say you had 100 units of
Singapore (MAS) issued a list of changes to the a REIT in 2010 and after five years in 2015, you still
regulations affecting real estate investment trusts own the same 100 units.
(REITs) in Singapore. Over that period of time, the REIT’s distributions
The MAS had first announced back in October grew by 100% from S$100 million to S$200
2014 that it wanted to refine REIT regulations and had million; that’s a very commendable performance.
come up with a list of proposed changes. After inviting But because its unit count had doubled from
feedback from the public and thinking through them 100 million to 200 million as a result of private
for a number of months, the MAS has settled on the placements and the payment of management fees
changes, which were released yesterday evening. with new units, the REIT’s distribution per unit had
Here’re some of the important ones (along with stayed flat at S$1. And you, as the investor, would
my comments). not have any added benefits whatsoever despite the
REIT having doubled its distributions.
On changes to the fee structure So, keep an eye on whether a REIT’s Manager’s
“MAS will not intervene on the structure of fees or fees are based at least partly on growth in the REIT’s
types of fees that Managers charge, but will require per unit figures. If that’s not the case, then take a hard
them to disclose the justification for each type of look at the justifications given by the Manager and
think it if makes sense.
fees charged. Managers will also have to explain the
methodology for computing performance fees, and With all that said, it’s worth stressing that having
justify how this methodology takes into account the right incentives is no panacea for a winning
unitholders’ long-term interests.” investment. Hutchison Port Holdings Trust (SGX:
NS8U) had fee structures which are very much
Investor maestro Charlie Munger has described aligned with unitholders’ interests. Sadly though,
incentives as one of the most important forces that can its total return (including gains from reinvested
shape human behaviour. To that point, Munger once dividends) from the close of its first-day of trading
said, “I think I’ve been in the top 5% of my age cohort in March 2011 to today is a negative 10.5%. There
all my life in understanding the power of incentives, are many other important factors to consider – such
and all my life I’ve underestimated it.” as the type and quality of the properties in a REIT’s
With the right incentives in place in terms of portfolio – when making an investment.
Manager fees that are aligned with unitholders’ long-
term interests, investors in REITs can thus stand a On changes to leverage limits
better chance of having a profitable experience. “The leverage limit imposed on a REIT will be
But what should unitholders look out for? This increased from 35% to 45% of the REIT’s total assets,
ties back to what truly drives the economic value of but a REIT will no longer be allowed to leverage up to
a REIT and that is, growth in its per unit figures like 60% with a credit rating.”
its distributions and net asset value. Warren Buffett, REITs in Singapore have so far been rather
Munger’s long-time business partner and an even disciplined in terms of risk-taking. When the MAS
larger investing father-figure, once said (emphasis first announced its proposals to change REIT
mine), “We do not measure the economic significance regulations last October, it mentioned that “most
or performance of Berkshire [the conglomerate [REITs]… have kept their leverage ratios within 35%”
controlled by Buffett] by its size; we measure by even though two-thirds of them had credit ratings and
per-share progress.” could thus have geared themselves up to 60%.
12 The Motley Fool Special Report fool.sgBut, greater leverage comes with higher risks.
As such, investors may still want to keep an eye on
how the balance sheets of their REITs are changing
given that they now have more leeway to take on
more borrowings.
On changes to remuneration
policies
“Managers will be required to disclose their
remuneration policy and procedures in the REITs’
Annual Reports.”
With better disclosure, investors can then make
sounder judgements on whether the policies
are reasonable or not. This is similar to the fee
structure changes mentioned earlier in the sense
that remuneration polices which are aligned with
unitholders’ interests can help increase the odds that the
REIT will be a good investment for the latter group.
Some yellow flags to watch out for could be
remuneration policies for management personnel
which does not take into account, or only gives
little consideration to, growth in important
drivers of a REIT’s economic value such as those
mentioned earlier.
A Fool’s take
There’re a lot more to the new regulations
governing REITs and the complete list can be found
on MAS’ website. The changes to the rules will
be implemented in phases starting from 2016; in
particular, REITs will have to start adhering to the
new disclosure standards for Manager fees by the
first Annual General Meeting of the financial year
ending on or after 31 December 2015.
fool.sg Special Report The Motley Fool 13REIT Structure
What Investors Should Know About a Typical REIT Structure
Using Frasers Centrepoint Trust as an Example
Sudhan P. | July 13, 2018
Real estate investment trusts (REITs) offer an Trustee
alternative to owning properties.
A trustee holds the underlying properties of a REIT
Under a REIT structure, investors’ (called on behalf of unitholders. The trustee’s role is to ensure
unitholders) money is pooled together to invest in that the REIT is complying with all applicable laws,
a portfolio of income-generating real estate such as and that the rights of unitholders are protected. In
offices, hotels, hospitals, and shopping malls. Just exchange for providing the services, the trustee is paid
like stocks, they can be bought and sold on a stock a fee. For Frasers Centrepoint Trust, the trustee’s fee is
exchange. In return for their capital, unitholders 0.1% per year of the value of the REIT’s properties.
receive regular distributions from the REITs.
The first Singapore REIT, CapitaLand Mall Trust Manager (or REIT manager)
(SGX: C38U), was listed in July 2002. It is also the The REIT manager is a separate company set
largest retail REIT by market capitalisation of S$7.4 up to run the REIT. It is usually a wholly-owned
billion, as at 31 March 2018. It retail peer would be or partly-owned subsidiary of a REIT’s sponsor
Frasers Centrepoint Trust (SGX: J69U), which is (more on sponsors later). The chief executive officer
also a retail REIT that owns shopping malls such as (CEO) of a REIT manager is just like the CEO of
Causeway Point and Changi City Point. any listed company.
Since REITs have a structure that is different from The central role of a REIT manager is to set the
listed companies, it would be useful to go through strategic direction for the REIT, and enhance the
a typical trust structure to help investors better REIT’s property value to maximise rental income,
understand REITs. which leads to higher distributions for unitholders.
Let’s use Frasers Centrepoint Trust’s structure as an A REIT manager also supervises a property
example here. manager (explained below) in its day-to-day
management of the assets.
REIT managers are paid recurring management
fees for their services. Frasers Centrepoint Trust’s
manager receives a base fee of 0.3% per annum of
the value of the REIT’s properties and a performance
fee of 5% per year of the net property income (NPI).
The manager can choose to receive the payments in
cash or units, or both.
Frasers Centrepoint Trust’s manager is also entitled
to receive an acquisition fee of 1% of the acquisition
price and a divestment fee of 0.5% of the sale price on
all acquisitions or disposals of assets.
Property manager
The property manager takes care of the day-to-day
operations of the properties in the REIT’s portfolio.
This includes daily upkeep of the properties, running
Source: Frasers Centrepoint Trust corporate website marketing events to attract tenants or shoppers (in the
14 The Motley Fool Special Report fool.sgcase of shopping malls), and ensuring the best tenancy mix to maximise rental income. In return, the property manager is paid a property management fee. For Frasers Centrepoint Trust, the property management fees are 2% per annum of gross revenue, and 2% to 2.5% per year of NPI. Sponsor (not present in all REITs) One thing missing from the flowchart above is the sponsor. In Frasers Centrepoint Trust’s case, the sponsor is Frasers Property Ltd (SGX: TQ5). Not all REITs have a sponsor. A sponsor typically supplies the properties to be placed into the REIT’s initial portfolio, and may continue to provide a pipeline of assets for the REIT. Most of the time, the sponsor also owns large stakes in the REIT manager, and the REIT. Frasers Property, which has full ownership of five retail malls in Singapore, except for one, could inject these properties into Frasers Centrepoint Trust’s portfolio in the future. The five properties are Northpoint City South Wing, Robertson Walk, Valley Point, The Centrepoint, and Waterway Point (33.3% ownership). As of 24 November 2017, Frasers Property had a 41.86% stake in Frasers Centrepoint Trust. The Foolish takeaway Understanding the different players in typical REIT structure helps investors to better appreciate how REITs function. Armed with this knowledge, they can make a more informed decision when investing in REITs. Some REITs with overseas properties may have additional layers, but the main trust structure is usually the same as what we have seen above. fool.sg Special Report The Motley Fool 15
Different Type of REITs Available
8 Different Types of REITs and Stapled Trusts Listed in Singapore
Sudhan P. | July 12, 2018
There are around 40 real estate investment trusts Industrial
(REITs) and stapled trusts in Singapore currently.
The REITs and six stapled trusts had an average The industrial sub-segment covers properties
distribution yield of 6.7%, as of 6 July 2018. The such as factories, warehouses and business parks.
figure is an average, so some REITs will have an Singapore’s largest REIT in terms of market
above-average yield while others will be below- capitalisation comes from this sub-sector, and
average. A REIT’s distribution yield can be affected that is Ascendas Real Estate Investment Trust
by a number of factors; one such factor is the sub- (SGX: A17U). Industrial REITs usually have high
segment in which the REIT operates in. distribution yields due to the short 30-year leases
that most Singapore industrial properties have as
With that in mind, let’s look at the various compared to retail or office real estate.
sub-segments a REIT or stapled trust operate in, as
categorised by the Global Industry Classification Others industrial REITs include AIMS AMP
Standard (GICS). Capital Industrial REIT (SGX: O5RU), Cache
Logistics Trust (SGX: K2LU), Mapletree Industrial
Retail Trust (SGX: ME8U) and Mapletree Logistics Trust
(SGX: M44U).
This sub-segment holds real estate used for retail
activities such as shopping centres, something that Office
most investors would be familiar with. To know if
a certain shopping mall is doing well, investors can This sub-segment owns properties that are used
simply walk into the mall and observe the shopper for office or commercial purposes. The largest office
traffic, the type of tenants, and whether the mall REIT listed here is CapitaLand Commercial Trust
is fully occupied with tenants. The popularity of (SGX: C61U). In recent times, the distribution yields
retail REITs could be why it tends to provide lower for some office REITs have been falling due to higher
distribution yields as compared to other REIT REIT unit prices resulting from a pickup in the
sub-segments. commercial sector.
Retail REITs with assets solely in Singapore Other listed commercial REITs include Frasers
include CapitaLand Mall Trust (SGX: C38U), Commercial Trust (SGX: ND8U), Keppel REIT
Frasers Centrepoint Trust (SGX: J69U) and SPH (SGX: K71U) and Manulife US Real Estate
REIT (SGX: SK6U). Investment Trust (SGX: BTOU).
Retails REITs such as CapitaLand Retail China Hotel & Resort
Trust (SGX: AU8U), Lippo Malls Indonesia Retail
This sub-segment hosts hospitality-related properties
Trust (SGX: D5IU) and BHG Retail REIT (SGX:
such as hotels and serviced residences. The entities
BMGU) hold overseas retail properties.
in this sub-segment are often structured as a stapled
Starhill Global Real Estate Investment Trust trust. Stapled trusts in the hotel and resort sub-sector
(SGX: P40U) owns a mix of both local and include CDL Hospitality Trusts (SGX: J85), Frasers
overseas properties. Hospitality Trust (SGX: ACV) and OUE Hospitality
Mapletree Commercial Trust (SGX: N2IU), which Trust (SGX: SK7).
owns both retail and office properties, is classified
as a retail REIT under the GICS. The trust owns five Healthcare
properties, including VivoCity, Singapore’s largest REITs in this sub-segment hold healthcare-
retail mall, and Mapletree Business City. related assets such as hospitals and nursing homes.
16 The Motley Fool Special Report fool.sgDue to their resilient and stable nature, healthcare REITs are popular among investors. Therefore, such REITs usually offer lower distribution yields and trade at a premium to their book values as compared to other REITs. REITs in the healthcare sub-segment are First Real Estate Investment Trust (SGX: AW9U) and Parkway Life REIT (SGX: C2PU). Others: Specialized, Diversified and Residential There are other REITs and stapled trusts that do not fall into the sub-segments discussed above. Keppel DC REIT (SGX: AJBU), which owns data centres, falls under the specialized sub-sector. Mapletree North Asia Commercial Trust (SGX: RW0U), formerly known as Mapletree Greater China Commercial Trust, is a diversified REIT. REITs such as Viva Industrial Trust (SGX: T8B) and Suntec Real Estate Investment Trust (SGX: T82U) are also classified as diversified REITs. Meanwhile, Ascott Residence Trust (SGX: A68U) is a residential REIT. fool.sg Special Report The Motley Fool 17
REIT Financial Statements
How to Choose the Best REITs to Invest In?
Sudhan P. | June 26, 2018
When it comes to investing in real estate
investment trusts (REITs), most investors look at the
distribution yield as part of their decision-making
process. However, the distribution yield of a REIT
tells us nothing about the sustainability of its
distributions, nor the strengths or weaknesses of the
REIT’s business.
Instead of focusing solely on a REIT’s
distribution yield, REITs investors should also look
at other factors. Only then can they make a more Source: First REIT 2017 earnings presentation
informed investing decision with a REIT. Here are
I also look at whether a REIT’s distributable
the important factors I look at.
amount and distribution per unit (DPU) are
improving consistently every year, apart from its
Growth in the basic numbers gross revenue and NPI. Taking First REIT as an
Firstly, I like to investigate whether a REIT’s example again, its distributable amount and DPU
gross revenue, net property income (NPI), and can be seen to be rising steadily from 2011 to 2017
distribution to unitholders are growing consistently from the following chart:
on an annual basis.
Gross revenue is the income that a REIT earns
through rent, operation of car parks, and so on. After
deducting property-related expenses such as property
management fees, property taxes, and maintenance
expenses, we arrive at the NPI figure.
The chart below is an example from First Real
Estate Investment Trust (SGX: AW9U) that shows
growth of its gross revenue and NPI from 2007 to
2017. First REIT is a healthcare-focused REIT. Source: First REIT 2017 earnings presentation
Property yield
The property yield is the NPI divided by the
valuation of the properties held in a REIT’s
portfolio. This metric reveals the intrinsic strength
of the REIT’s underlying properties, and is more
critical than calculating the REIT’s distribution
yield (as the distribution yield is a function of the
REIT’s unit price).
In 2017, First REIT had an NPI of S$109.5
million and S$1.35 billion in investment
18 The Motley Fool Special Report fool.sgproperties. This equates to a property yield of which is a valuation metric. Other valuation metrics
8.1%. Property yields in the range of 5% to 9% are involve looking at the REIT’s capitalisation rate, net
great, in my opinion. asset value, or replacement cost.
The property yield can then be compared on
either a yearly basis to look for trends, or with other
The Foolish takeaway
REITs operating in the same industry. For example, Recently, my Foolish colleague, Jeremy Chia,
Parkway Life REIT (SGX: C2PU), another highlighted in his article that Cache Logistics
healthcare REIT, only had a property yield of 5.9% Trust (SGX: K2LU) had a distribution yield of
in 2017. In another instance, the two retail REITs, 8.3%. This is one of the highest yields in the
CapitaLand Mall Trust (SGX: C38U) and Frasers Singapore stock market.
Centrepoint Trust (SGX: J69U), had property However, after digging a little deeper, investors
yields of 5.8% and 4.9%, respectively, in 2017. would realise that the REIT has a relatively high
gearing ratio, and an unhealthy interest coverage
Gearing and interest coverage ratios ratio. These factors could ultimately put Cache
The gearing ratio and interest coverage ratio reveal Logistics Trust’s DPU at risk. Therefore, Foolish
the strength of a REIT’s balance sheet. investors should always look beyond distribution
The gearing ratio is calculated by dividing the yields when buying REITs.
total debt of a REIT by its total assets. As of 31
December 2017, Parkway Life REIT had a gearing
ratio of 36.4%. REITs in Singapore have a gearing
limit of 45%, as required by the Monetary Authority
of Singapore.
The interest coverage ratio is derived by dividing
a REIT’s NPI by its finance costs. At the end of
2017, Parkway Life REIT had an interest coverage
ratio of over 10. This shows that even if the REIT’s
NPI were to decline by 60%, it would still be able
to service its debt. I like to look for an interest cover
ratio that is above 4.
Other metrics to look at
Investors must also look at general operating
metrics such as the REIT’s portfolio occupancy
rate, and other metrics specific to a REIT. Two
REIT-specific metrics for retail REITs would be
shopper traffic numbers and tenants’ sales. For
hospitality REITs, investors can look at the revenue
per available room and average daily rate.
I also like to look at a REIT’s funds from
operations (FFO) and adjusted funds from
operations (AFFO). FFO strips off cost-accounting
methods such as depreciation of investment
properties that may inaccurately distort a REIT’s
cash-generating ability. The FFO is akin to the
operating cash flow of a company, while the AFFO
is like a company’s free cash flow.
Only after looking at all the factors mentioned
above do I look at the distribution yield of a REIT,
fool.sg Special Report The Motley Fool 19REIT Valuation
Valuing REITs: A Quick Primer
Sudhan P. | July 25, 2018
Real estate investment trusts (REITs) cannot As of 30 March 2018, Lippo Malls Indonesia
be valued by the typical price-to-earnings (P/E) Retail Trust had a NAV of S$0.30 per unit. This
ratio as their earnings are distorted by revaluation means that at a unit price of S$0.32, it is trading
of investment properties, change in fair value of at a P/B ratio of 1.07 ((S$0.32/S$0.30) x 100%).
derivatives, and so on. In other words, it means that investors who invest
How else can REITs be valued then? Let’s look at in Lippo Malls Indonesia Retail Trust are paying
some common ways of evaluating them. S$1.07 for S$1 worth of the REIT’s net assets.
Some REITs trade at a massive premium to their
Distribution yield NAV as the market perceives them to be safer or to
The distribution yield shows how much an possess strong fundamentals.
investor receives in distribution per unit (DPU)
for the unit price paid for a REIT. Since REITs are
Capitalisation rate
required to distribute at least 90% of their taxable Capitalisation rate, or cap rate, is a measure of the
income to their unitholders in order to enjoy tax return on investment of a property. It is derived by
benefits, many REITs have high distribution yields. taking the net property income (NPI) of a property
As of 6 July 2018, the average distribution yield for and dividing it by its value. For example, in 2017,
Singapore REITs was 6.7%. CapitaLand Mall Trust’s (SGX: C38U) Tampines
Mall had a valuation of S$1.05 billion and an NPI
Let’s go through a simple example to learn
of S$58.3 million. Therefore, its cap rate was 5.6%.
how to calculate a REIT’s distribution yield.
Retail REIT Lippo Malls Indonesia Retail Trust The cap rate can also be calculated on a portfolio
(SGX: D5IU)has a DPU of S$0.0322 for the last level and is sometimes known as the property yield.
12 months. At its unit price of S$0.32 at the time During the same year, CapitaLand Mall Trust had
of writing, it has a distribution yield of 10.1% an NPI of S$478.2 million and a portfolio value of
((S$0.0322/S$0.32) x 100%). S$8.31 billion, giving a capitalisation rate of 5.8%.
Most investors are usually enticed by a high Cap rates should be compared between REITs of
distribution yield. However, there are many reasons the same type to give an apple-to-apple comparison.
for a REIT’s yield to be higher than that of another
REIT. For one, poor economic fundamentals The Foolish takeaway
surrounding a REIT could cause its unit price to fall, The distribution yield, P/B ratio, and cap rate are
increasing its distribution yield as a result. not the only valuation methods that investors can use.
We should focus on a REIT’s DPU track record There are other ways of valuing REITs, such as the
instead of its distribution yield alone. price-to-funds-from-operations ratio, the replacement
cost method, and comparable sales method.
Price-to-book ratio However, investors should not be too hard up on
The price-to-book (P/B) ratio is computed by any particular valuation method as valuing a stock
taking a REIT’s current market price and dividing it or a REIT is more art than science. Sticking to
by the REIT’s latest reported net asset value (NAV) simple valuation methods mentioned in the article
per unit. The NAV of a REIT is calculated with the should do the trick.
simple equation of total assets minus total liabilities.
A P/B ratio below 1 shows that a REIT is trading at
a discount to its NAV.
20 The Motley Fool Special Report fool.sgChoosing the Best REITs
3 Factors to Consider When Investing in REITs
Jeremy Chia | December 27, 2017
Real estate investment trusts (REITs) have been management team is reliable and skilled?
performing well in the last five years, beating the
A good way to assess a management team is to
broader stock market index by around five percentage
simply do a quick Internet search on the members
points. However, not all REITs have performed
of the team and look out for any red flags, such
equally well. Some have lagged behind their peers,
as previous misdeeds or fraud. Good indicators
while others have outperformed considerably. As
of a strong manager are having experience in the
investors, we are always striving to find the best
industry, having a clean track record and having a
investment to grow our wealth and looking for these
proven ability to grow the REIT.
outperformers can make a huge difference.
With that in mind, I would like to point to three The Foolish bottom line
characteristics of a REIT that I look for when On average, REITs in Singapore have performed
investing. admirably. However, not all REITs have done
equally well. Some have only returned 5% a year,
Consistently high occupancy rate while others have returned more than 20% a year.
A high occupancy rate means that the REIT Obviously, that is a huge difference and finding the
can lease out most of its leasable area and can high performing gems can make a big difference to
maximise the return on its properties. A REIT that our portfolio. Hopefully, this article gives us a good
can consistently maintain a high occupancy rate over stepping stone to finding those REIT darlings that
many years shows the strength of the management can help grow our portfolio even more.
team in utilising its assets and maintaining a healthy
relationship with its tenants.
The stable occupancy rate also makes revenue
more predictable, and investors can be assured of
sustainable and stable dividends.
Price-to-book ratio below one
The price-to-book ratio compares the price of
a unit of a REIT with the book value per unit. As
investors, we should look for REITs that are trading
below its book value.
Because the book value of REITs is mostly made
up of properties, it is a good indicator of how much
unitholders would get back should the REIT decide
to liquidate its assets. A low price-to-book ratio will
reduce the risk of any losses should the REIT fold.
A strong management team
Managing a REIT takes skill and experience. As
such, not every management team can do a good job.
As investors, we need to ensure that our investments
are in safe hands. However, how do we know if the
fool.sg Special Report The Motley Fool 21Choosing the Best REITs
How to Identify REITs That Have a Portfolio That Can Appreciate
in Value
Sudhan P. | July 25, 2018
A REIT with a portfolio of properties that can Assets located in high-growth
appreciate in value over the long term can reward
unitholders in two ways. markets
Firstly, it can unlock unitholder value when it REITs that have assets that are strategically
sells the asset at a profit. Secondly, a portfolio that located in high-growth areas are also more likely to
appreciates in value increases the book value of experience asset revaluations.
the REIT, thereby giving it a larger asset base to Take CapitaLand Retail China Trust (SGX:
increase its debt load to fund further acquisitions; AU8U) for example. The REIT owns a portfolio
this could, in turn, increase the REIT’s distributions of 11 retail malls in China. I will take one of its
to unitholders. properties – CapitaMall WangJing – as a point of
So, how can investors identify REITs that have reference. CapitaMall WangJing is a shopping mall
portfolios that could potentially grow in value? Here located in the densely populated residential suburb
are two things to look at. of Wangjing in Beijing.
Because the property is located in such an
Free-hold or long land-lease optimal market, it has seen positive revaluations
tenures consistently over the past few years; its value has
grown from RMB 1.43 billion in June 2011 to RMB
The length of the land-lease tenures of a REIT’s 2.38 billion currently. The growth has happened
property portfolio is crucial in predicting its likelihood despite the fact that the property sits on a piece of
to appreciate in value. Properties that sit on land that land with a relatively short lease (expiry is in 2043).
are free-hold are more likely to increase in value over
time, whereas properties that are on land with short The Foolish bottom line
lease tenures are likely to start depreciating in value as
the land-lease maturity date approaches. Positive revaluations of a REIT’s properties
may not directly lead to cash inflows for the REIT.
A case in point is Parkway Life REIT However, it is still essential that investors do not
(SGX:C2PU), which has properties that are either on underestimate the importance of such revaluation
free-hold land, or land with long leases. Partly because gains. Not only can the REIT realise its gains in
of this strategy, the REIT has managed to report the future, but it is also important in improving the
valuation gains in its portfolio on a very consistent REITs ability to take on more borrowings, which
basis. For instance, its properties had a valuation gain can fuel future growth.
of S$26 million in 2017, S$18.2 million in 2016, S5.7
million in 2015, and S$45 million in 2014.
This consistent growth in the value of Parkway Life
REIT’s portfolio provides a larger asset base on which
it can borrow more to further expand its portfolio.
On the point about borrowing, REITs have a
regulatory gearing limit of 45%, where the gearing
ratio is calculated by dividing total debt by total assets.
From this, you can see that having a high asset base
enables more debt to be taken on by a REIT.
22 The Motley Fool Special Report fool.sgYou can also read
