Can someone explain REITs, what to look out for in REITs, and what the different channels we can start investing in REITs are?

Hi anon,

The full answer can easily be a 30 page book, so I'll summarize the salient points here:

REITs are basically investments into a portfolio of real estate property, depending on the sector they are going into. You can buy them as you would any other share. Some things you will want to take note of are:

• Understand the business model of REITs

• Know the various types of REITs (retail, commercial, etc) and their pros and cons

• Do not fall into the dividend trap

• Understand the properties that the REIT owns (tip: overseas properties are riskier and hence should demand a higher return)

• Buying low gives a margin of safety

• A strong sponsor helps

For more information and a deeper analysis, it would be good to consider reading up more. There are several books on this topic, and numerous seminars that you can consider attending. Add in Ser Jing's and Jonathan's answers to the mix and you should be able to get a good head start in understanding REITs.

A few things for you to look out:

1. Portfolio occupancy

2. Weighted average lease expiry

3. Property yield

4. Dividend yield

5. Interest borrowing costs

Hello! There are already great answers from people like Wallace Chai and Jonathan Chia on what REITs are. Regarding what factors you should consider before jumping in, I had previously answered a very similar question in Seedly.

For your convenience, I've reproduced the answer below.

"I helped to develop the investment framework for a Singapore-REIT-focused investment newsletter with The Motley Fool Singapore. The newsletter has delivered good investment returns, so I thought I can offer some useful food-for-thought here. The REIT newsletter was launched in March 2018 and offered 8 REIT recommendations.

As of 15 October 2019, the 8 REITs have generated an average return (including dividends) of 28.8%. In comparison, the Straits Times Index's return (including dividends) was -3.1% over the same time period. The average return (including dividends) for all other Singapore-listed REITs that I have data on today that was also listed back in March 2018 is 17.2%.

The investment framework we used had four key pillars.

First, we looked out for long track records of growth in gross revenue (essentially rent the REITs collect from their properties), net property income (what’s left from the REITs’ rent after paying expenses related to the upkeep of their properties), and distribution per unit. A REIT may fuel its growth by issuing new units as currency for property acquisitions and dilute existing unitholders’ stakes. As a result, a REIT may show growth in gross revenue, net property income, and distributable income, but then have a stagnant or declining distribution per unit. We did not want that.

Second, we looked out for REITs with favourable lease structures that feature annual rental growth, or REIs that have demonstrated a long history of increasing their rent on a per-area basis. The purpose of this pillar is to find REITs that have a higher chance of being able to enjoy organic revenue growth.

Third, we looked for REITs with strong finances. In particular, we focused on the gearing ratio (defined as debt divided by assets) and the interest coverage ratio (a measure of a REIT’s ability to meet the interest payments on its debt). We wanted a low gearing ratio and a high-interest coverage ratio. A low gearing ratio gives a REIT two advantages: (a) the REIT is likelier to last through tough times; and (b) the REIT has room to take on more debt to make property acquisitions for growth. A high-interest coverage ratio means a REIT can meet the interest payment on its borrowings without difficulty. At the time of the REIT newsletter’s launch, the eight recommended-REITs had an average gearing ratio of 33.7%, which is far below the regulatory gearing ceiling of 45%. The eight recommended-REITs also had an average interest coverage ratio of 6.2 back then.

Fourth, we wanted clear growth prospects to be present. These prospects could be newly-acquired properties with attractive characteristics or properties that are undergoing redevelopment that have the potential to deliver higher rental income in the future.

It's important to note that there are more nuances that go into selecting REITs, and that not every REIT that can ace the four pillars above will turn out to be winners. But at the very least, I hope what I’ve shared can be useful in your quest to invest smartly in REITs. To sum up, keep an eye on a few factors:

(1) Growth in gross revenue, net property income, and crucially, distribution per unit.

(2) Low leverage and a strong ability to service interest payments on debt.

(3) Favourable lease structures and/or a long track record of growing rent on a per-area basis.

(4) Catalysts for future growth."​​​

Real Estate investment trusts (Reits) are basically a basket of real estate properties, as the name suggests, put together by a sponsor company. Units (shares) are then sold in a trust structure. To qualify to be a reit, 90% or more of income needs to be distributed to unit holders.

There are different reit sectors available, ranging from industrial / logistics, hospitality, retail, commercial and health care. Each sector has its own pros and cons and there is no 'perfect' reit. You can research each sector's strengths and weakness and decide if you want to focus on that sector. Then pick a reit from that sector.

Things to look out for are like yield (are you happy with it?), stability of stock price and distribution, has stock price and amount of distribution increased, whether there are any questionable management decisions (look at OUE for example). Can download the annual or quarterly report from the reit's website and have a look at the management's outlook view of the sector as well.

There are a couple of ways to invest into reits - either lump sum through a broker or doing dollar cost averaging. Avoid reit etfs or funds as the yield is typically lower and you need to pay management fees. You can replicate the holdings on your own and achieve better returns.