Asked on 07 May 2019
Should I be picking on some of the REITS like FIRST , CapitaLand Trusts, Mapletree trust or I should just go for the Lion-Philips S-REITs ETF ?
As I’m someone who don’t have a lot of capital and someone starting the investment journey.
What are the recommended REITs I should go for if I’m picking my own ?
Hello! 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.
Lion-Phillip S-REIT ETF is a without a doubt a good option to start with, given it is the only S-REIT focused ETF and comprises of 28 S-REITs including CapitaLand Mall Trust, CapitaLand Commercial Trust, and Mapletree Commercial Trust as its top 3 holdings as of June 2019, but you can also try the below too:
NikkoAM-Straits Trading Asia Ex-Japan REIT ETF: This ETF tracks the performance of the FTSE EPRA/NAREIT Asia ex-Japan Net Total Return REIT Index, with CapitaLand Mall Trust, Ascendas REIT, and Link REIT as its top 3 holdings as of June 2019.
Phillip SGX APAC Dividend Leaders REIT ETF: This ETF comprises of the 30 highest total dividend-paying REITs in the Asia Pacific ex-Japan region, with Link REIT, Scentre Group and Stockland as its top 3 holdings as of July 2019.
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Both Jonathon and Vineeta has listed down a long list of REITS, pretty sure you're slightly overwhelmed.
Perhaps instead of advising you what REIT to choose, here are various considerations when choosing one and perhaps armed with this knowledge, you are able to better make your own decision on which REIT to select!
When one purchases a REIT, in fact any stock/share, one wants 2 things.
Consistent + Stable + Growing Dividends
The former is achieved through finding an asset that would constantly appreciate as well whereas the latter is through having a consistent + stable + growing Cashflow.
The points mentioned below are not exhaustive to each category and may affect the other category to a certain extent. But all in all, these are what a REIT should practise.
Hospitality REITs: **Location with high traffic flows -- Demand brings about Supply etc.
Commercial REITs: Location that is easily accessible, CBD area / near wide range of amenities
2) Land tenure
Having a freehold land would allow one to hold the asset indefinitely until a buyer comes along with the right price.
What's most important is the ability of REITs that are able to take the above 2 factors into account and purchase / dispose a property at an attractive price.
1) Occupancy Rates
Given how REITs stands for Real Estate Investment Trusts, which means its revolving around Real Estate (which derives from the term Realty), take-up rate of the real estate is one of the major deciding factor in investing in REITs. What does take-up rate give you? It gives you the stability of Cash-flow.
2) Weighted Average Lease Expiry (WALE)
Aside from the Occupancy Rates, WALE is important as it shows how long does tenants have before their lease expires. This gives a rough indication to REIT holders on the stability of cashflow as well.
Did up an infographic on the various forms of REITs available in Singapore and how they rank on the Stability of Cashflows and their rental agreement terms.
Hope that now you're armed with this knowledge, you would be able to identify REITs that are the "cream of the crop" within each sector!
CapitaLand Mall Trust
CapitaLand Commercial Trust
Mapletree Commercial Trust
Mapletree Logistics Trust
Mapletree Industrial Trust
Ascott Residence Trust
08 May 2019
I'll suggest avoiding the reit etfs. Doesn't make sense to pay management fees and get a lower dividend yield.
For me I'll look to any of the mapletree reits, capitaland issued reits, Frasers logistics and industrial, AIMS APAC. SPH reit as well as they seem to be finally looking to expand their portfolio. Unfortunately, these are currently trading above their nav now and not really a good time to enter. If you are not currently vested, look to hold cash while waiting for an opportunity. Or consider doing a small monthly dca to start getting vested. I'm currently doing this with Mapletree Logistics as I think they still have a small upside to get to. But please do your own due diligence first
2 more comments
If you do not have a lot of capital, REITS ETF can be one way to start as this will incur less transaction fees. Once your capital is increased, you can consider to buy individual REITS.