There are many things to like about REITs. The appeal is even greater in a country like Singapore where people have a strong affection for owning real estates. This is probably the reason why we see so many REITs listing in Singapore over the last few years. In 2019 alone, we had witnessed the listing of 4 REITs, ARA Hospitality Trust, Eagle Hospitality Trust, Lendlease Global Commercial Reit and Prime US Reit.
The increasing relevance of REITs as an investment option can be seen from the chart taken from Bloomberg below where the weightage of REITs on the Straits Times Index (STI) has grown from 4% in 2015 to 10% in February 2020. This is even before accounting for the addition of Mapletree Industrial Trust (MIT) that was recently added into the STI in June this year.
In this article, I will be sharing my opinion on the viability of REITs as an investment product and why I believe it will continue to stay relevant going forward.
Competitive Long-Term Performances
REITs are a class of investments that can be seen as a hybrid between bonds and equities. On one hand, they offer a regular income stream like bonds through their quarterly or semi-annual distributions. On the other hand, they offer the potential of long-term capital appreciation like equities.
A classic example would be Mapletree Industrial Trust (MIT) which is one of the best performing Singapore Reit (S-REITs) since its listing in 2010. Referencing to the chart below, MIT has returned 223.7% in the form of capital appreciation and an additional 114.1% in dividends over a 10-year horizon. This gives a staggering 337.8% in total returns!
As a comparison, the S&P 500 index has returned approximately 250% even with dividends reinvested in the same 10-year period. While it can be argued that MIT is a one-off success case and does not reflect the wider returns generated by REITs, it is nonetheless an indication that REITs can offer a solid return if managed right.
Hassle-free Investment Option
Another key advantage of investing in REITs is the fact that you do not have to worry about managing and upkeeping your assets. As compared to buying a million dollars condominium and renting it out for rental income, REITs are relatively hassle-free as all maintenance works are handled by a team of professional property managers. In addition, these asset managers are also responsible for undertaking Asset Enhancement Initiatives (AEI) to ensure the long-term viability of your asset and maximise its value.
For many Singaporeans, it is common to invest their savings through buying a condominium and collecting rental payment to service the mortgage while hoping to enjoy some form of capital appreciation in the future. In the process of doing so, you will have to go through the hassle of sorting out the housing loan and refinancing it as interest rates fluctuate to ensure you are optimising your interest expense. In addition, you are also responsible for sourcing for tenants while upkeeping the property to ensure it is in a satisfactory state for rent. All these incur additional time and costs and at the end of the day, you only get to enjoy a meagre net rental yield of 2% to 3%.
On the contrary, in the context of a REIT, we need not have to worry about refinancing and upkeeping the asset as these are all taken care of by the property manager and asset manager. In addition, we get to enjoy a higher dividend yield of anything between 4% to 8% in the context of Singapore. Referencing to the chart from Bloomberg below, it can be seen that across the world, dividend yield of REITs can range from anywhere between 3.5% to 6.3%, much higher than the net rental yield from buying and renting out a condominium in Singapore.
Another interesting point from the chart above is the fact that S-REITs actually offer one of the highest dividend yield in the world. In my opinion, this premium is unjustified given the safe-haven nature of Singapore assets and our relatively strong currency. However, to determine if S-REITs are truly undervalued relative to REITs in other markets, we will have to look at the yield spread between the dividend yield and government bond yield due to the bond-like nature of REITs, something that we will leave out of our discussion for now.
Favourable Credit Conditions
Since the Global Financial Crisis, loose monetary policy has led to an era of ultra-low interest rates. The pandemic this year has exacerbated this trend. For example, the UK has for the first time in its history, sold negative yielding bonds, following its counterparts in Japan and EU that have for large parts of the last few years been issuing bonds that are negative yielding. Referencing an article from FT that reads “There is no stock market bubble”, the chart below shows that bonds are expected to yield much lower returns in a post-covid world, thus supporting the valuation REITs and also equities as a whole.
Ultra-low interest rates are beneficial for REITs which typically depend on leverage for its daily operations and to expand its portfolio through acquisitions. In the context of Singapore, REITs are mandated by MAS to have a maximum leverage of 50%, a threshold that was recently raised from 45%. With a lower for longer interest regime and greater debt headroom, REITs have more wiggle room as interest expenses will fall thereby boosting distributable income to shareholders while raising the prospects of more yield accretive acquisition opportunities.
As such, I do believe that a low interest rate environment will boost the prospects of alternative investments in the form of real estates.
The above 3 reasons are just some of the many factors that are driving the increasing relevance of REITs as an investment option for fund managers and retail investors alike. While the wider macro indicators seem to provide some strong tailwind for REITs investment, it is still important to do your own due diligence when determining if REITs investment is suitable for you as an investor given the varying risk profile of individuals.
Do drop me any comments you may have below and I will respond to you at the soonest. Cheers and have a great 2021 ahead!
Please note that the information that I have shared are for informational purpose only. It represents my personal opinion and should NOT be taken as a business, legal, tax and investment advice.