Explainer: What Are Real Estate Investment Trusts (REITs)?

This was originally posted on Planner Bee.

Many want to make investments in real estate but doing so often requires sizable capital. This often makes it tough for many to make any notable investment in property, losing out on potential lucrative returns.

Real Estate Investment Trusts (REITs), however, can turn what was once only available to high net-worth individuals accessible to just about anyone keen to invest.

Here, we look into what are REITs, the types of REITs out there, why you should invest and how to invest in REITs in Singapore.

What are REITs?

Real Estate Investment Trusts (REITs) are a form of investment in companies that own, finance, or operate income-producing real estate across various property sectors. They are similar to investment funds as REITs pool capital from numerous investors to purchase and manage a portfolio of real estate assets. Other than capital appreciation, these investors also earn from dividends.

REITs provide diversification for investors with their portfolios of real estate assets, and are a key component when constructing fixed-income portfolios. Many REITs are publicly traded on major securities exchanges, and investors can easily buy and sell them like stocks.

Singapore has the largest REIT market in Asia outside of Japan. In Singapore, there are 41 Singapore-listed REITs (S-REITs) and property trusts with a total market capitalisation of approximately S$100 billion (as of 31 January 2024). Over 90% of S-REITs and property trusts own properties outside of Singapore, of which 17 of these have a real estate portfolio consisting entirely of overseas properties.

Types of REITs

Singapore-listed REITs are typically classified as retail, office, industrial, healthcare, hospitality, data centre, and diversified. These REITs usually generate income by leasing out the space they own and/or manage to tenants.

Why invest in REITs?

Investing in REITs or S-REITs offers several advantages, including:

1. Steady dividend yield

One of the biggest benefits of investing in REITs is their high-yield dividends, due to how REITs are mandated to pay out at least 90% of their taxable income as dividends. This makes REITs an attractive investment choice for investors who want a steady income stream with their investments.

2. Portfolio diversification

Investing in a REIT can provide exposure to a diversified portfolio of properties across a range of property sectors and countries, reducing the risk associated with investing in a single asset. REITs also help investors diversify their portfolios by reducing the correlation to the stock and bond markets, lowering their risk profile without negatively impacting returns.

3. Low barrier of entry

It is more affordable to invest in REITs than buying a property outright for investment. They can be traded in minimum board lot sizes of 1, 10 or 100 units, and a rookie investor can easily get into a REIT investment with as low as S$100.

4. Liquidity

Shares of publicly listed S-REITs are traded on the Singapore Stock Exchange (SGX) and foreign REITs are also available to trade on their respective Stock Exchanges. They can be conveniently and quickly bought and sold based on real-time pricing anytime the market is open, making REITs highly liquidable.

5. Capital appreciation

Real estate properties tend to appreciate over time due to market demand, inflation, redevelopment and location. This appreciation contributes to the overall return on investment for REITs. REIT managers also actively seek to enhance the value of their properties through renovations and strategic acquisitions, which can lead to higher property valuations and, consequently, higher REIT unit prices.

6. Professional management

REITs are managed by professionals with expertise in real estate management, acquisitions, and market analysis. This professional oversight ensures that the properties are well maintained and optimally managed to maximise returns.

Read more: Should I Invest in Real Estate or ETFs?

Risks in investing in REITs

While investing in REITs sounds attractive, it comes with risks, as with any other investment. Here are some common risks that you should take note of before getting into any REITs:

1. Market risk

Investors risk receiving less than the original amount invested when they sell their units as REIT prices are subject to demand and supply conditions. Market prices generally reflect investor confidence about the property market and its returns, the REITs’ management, and interest rates amongst other factors.

2. Income risk

A REIT’s value is very much interlinked to the tenancy rates of the properties that it owns. Should they report an operating loss due to factors such as a drop in rental revenue or falling occupancy rates, the dividend payout to unit holders will be reduced.

3. Interest rates and leverage risk

REITs tend to borrow substantially to buy their assets. If there is an increase in interest rates, the interest expense to REITs will also increase, impacting their profits. Rising interest rates can also make other investments more attractive, leading to selling pressure on REITs.

Moreover, by borrowing substantially, the REIT is using a huge amount of debt to finance property acquisition, increasing leverage risk. In the event of an insolvency, the assets of the REIT will be liquidated and used to pay off creditors before unit holders. Investors therefore face the risk of receiving less-than-expected amounts, or in a worst case scenario, nothing at all.

4. Refinancing risk

As REITs are required to distribute a large amount of their income to unit holders as dividends, they might not have the ability to build up cash reserves to repay loans. They would have to enter into new borrowing agreements or issue bonds to repay existing loans, giving rise to refinancing risks of unfavourable terms. If they cannot refinance, they might have to sell off properties mortgaged under the initial loan, affecting the unit price and income distribution.

How to invest in REITs?

One of the easiest ways to invest in S-REITs is by buying directly into individual S-REITs listed on the SGX. You can do that by enlisting the help of brokers, or via online brokerages such as Moomoo, Syfe, and Tiger Brokers. You can also gain access to foreign REITs with these online brokerages.

You can also invest in a S-REIT by investing in a S-REIT Exchange-Traded Funds (ETFs) listed on the SGX. S-REIT ETFs offer investors the option of accessing a range of Singapore and/or global REITs, attaining a diversified REIT portfolio without the hassle of managing individual REITs.

In conclusion…

Investing in REITs provides a balanced mix of income, potential capital gains, diversification, and liquidity. These attributes make REITs an appealing investment option for those seeking exposure to real estate without the complexities and risks associated with direct property ownership.

However, just like any other investment, there are risks associated with getting into REITs. These include market risks, income risks, interest rate risks, and more. You should weigh the pros and cons of investing in REITs and decide if this investment falls within your risk tolerance.