Singapore's real estate market has long been a cornerstone of investment for locals, driven by the city-state's land scarcity and robust economic growth. Among the various investment vehicles, Singapore-listed Real Estate Investment Trusts (S-REITs) stand out as a popular choice for both seasoned and novice investors.

S-REITs offer a unique blend of steady income through regular distributions and potential capital appreciation. Managed by professional REIT managers, these trusts invest directly in income-generating properties, both locally and overseas. 

In this article, we will examine the market dynamics that influence REIT performance. Whether you’re looking to diversify your portfolio or generate a steady stream of income, understanding S-REITs can provide valuable insights for making informed investment decisions.

What are S-REITs?

A REIT is a trust structure that invests directly in income-generating real estate.

Each of these trusts is managed by a professional REIT manager, who is responsible for property and facilities management, lease management, and acquiring or disposing of properties. 

S-REITs can also hold overseas properties in their portfolios. They are required to distribute minimally 90% of their taxable income each year to unitholders as distributions, paid out typically every quarter, half a year, or yearly.

Why do Singaporeans invest in S-REITs?

In 2023, S-REITs returned 6.6%, and the latest Chartbook: SREITs and Property Trusts (Q3 2024)  by SGX shows that yields were much higher than other asset classes.

S-REITs dividends are a source of passive income

As most of their operating cash flow is paid out as distributions, this makes buying S-REIT units an attractive way to generate side income. 

Studies have shown that retail investors generally prefer getting their investment returns through dividends, over capital gains. Receiving dividends from SGX-listed companies does not incur any transaction costs, unlike when investors sell stocks through a brokerage to collect capital gains.

REITs also make it cheaper for investors to generate cash flows from their investments, which is especially important for investors who are near or at retirement or anyone who prefers to build a passive side income from dividends. 

Real estate’s status as a “reliable” form of investment

With a growing population in land-scarce Singapore, property investing has a longstanding status of being a reliable investment vehicle. Property flipping, which gained popularity in the 80s, may have contributed to this discourse.

Property flipping had worked well for the earlier generations of Singaporeans, but in recent years, stricter property regulations are increasingly deincentivising profiting off the sales of public housing, such as HDB flats.

Familiarity bias

Many of these S-REITs are operated by brands that many Singaporeans grew up with, such as CapitaLand, Fraser Property, and Lendlease. Investing in these sponsors’ REITs thus feels less intimidating.

The physical presence of a shopping mall or healthcare facility also makes it seemingly easier for investors to assess the REIT’s operating performance, although that should not be the only factor to consider. It also helps that many S-REITs are listed and pay out dividends in Singapore dollars. This makes investing easier to manage as investors don’t have to worry about taxes or exchange rate risks.

When is a good time to invest in S-REITs?

Before we dive into it, there are different types of REITs, which can perform differently under the same market conditions. For instance, during the Covid-19 pandemic, retail and commercial REITs faced challenges as people spent most of their time at home. On the other hand,  industrial REITs generally fared better due to the surge in e-commerce demand.

When we wrote this article in 2022, it was during a time when many investors dumped their S-REITs. Let’s take a look at what happened:

What happened to S-REITs in 2022?

The US Federal Reserve signalled that it will hike rates in 2022 to temper inflation amid a strong US labour market. Deciding how aggressively to raise rates is a high-wire act for central bankers: if overdone, the sharply higher financing costs — in the form of sharply higher interest rates — can undermine economic growth.

At the same time, central banks must also cool inflation where it can, so that purchasing power is still in relative control of ordinary consumers buying their daily essentials.

There were concerns that the Fed had been too late in reining in inflation – the then-ongoing Russia-Ukraine war meant more uncertainty in the number of rate hikes the Fed would undertake that year. 

Such volatility scared off uneasy investors. Some feared that REITs would be caught off-guard by more expensive debt that they typically used to acquire properties. Higher debt would have made their purchases less lucrative.

Since property income is passed on to S-REIT investors via distributions, some investors thought that their distributions would be less appealing than before. 

Yet, brokerages such as DBS thought that refinancing rates should be manageable. DBS had estimated that a 1% rate hike would only bring headline distribution yields down by at most 20 basis points (0.2%) from the then-6% yield. To add, a 1% hike in interest costs only would have shown up in a REIT's performance after three years. 

Between 1 Jan 2022 and 6 Mar 2022, S-REITs underperformed the benchmark index. The sector lost 2% in that period, while the Straits Times Index gained 4.4% in total returns.

It’s difficult to find the “best time” for S-REITs

Fast forward two years later, in 2024, S-REITs saw a surge in demand after the Fed finally made its first rate cut in September. A few months later, after Trump’s re-election, S-REITs took a tumble due to concerns over rising US government debt and inflation. It is extremely challenging to time the market correctly.

Hence, investors need to do their due diligence to assess if the S-REITs they invest in are prepared for interest rate changes. They may, for example, have most of their debt cost fixed at a certain interest rate. This eliminates the risk of them servicing debt priced on floating rates in a rising rate environment. 

Beyond the market volatility, there are broader limitations for investors to note.

What are the risks of investing in S-REITs?

Lack of diversification 

The S-REIT market, despite its strong growth, is significantly smaller than other markets. It would be prudent for investors to invest in other real estate markets as well, such as the US, Japan, and Australia.

Overconcentration in a specific sector and geography exposes the REIT to risks such as changes in local economic conditions, a certain sector downturn, or even natural disasters.

It's critical to not just diversify across different properties, which they may be able to get through a REIT investment, but also to diversify more broadly. 

Depending on risk appetite, investors can consider investing in equities and fixed income, not just REITs, to build a more balanced portfolio 

Distribution limitations 

Depending on life stage or financial needs, not all REIT investors are looking for immediate payouts. Many investors are working adults with a steady stream of income that can support their expenses. It can be inefficient to receive distributions if you don’t have an immediate need for them.

Investors can opt to receive their distributions in the form of REIT units, but such odd lots are harder to sell. 

REITs also distribute most of their income to investors, rather than investing the income in capital, technology or business acquisition. This curbs the opportunities that REITs can capitalise on to improve their bottom line in the future.

They also may not be able to charge higher rental rates if the rental market is competitive.

How do you invest in S-REITs?

S-REITs are traded on the SGX – some of the most common ones are Mapletree Industrial Trust, Keppel REIT, and CapitaLand Integrated Commercial Trust. 

Familiarity can breed complacency. S-REIT investors should be mindful of the risk involved with investing solely in the sector. With more diversified and fuss-free investment options, investors do not need to limit themselves to S-REITs to get passive income or real estate exposure. 

Mindful of the aforementioned risks, diversification can help achieve better risk-adjusted returns. This can be done with the Endowus Real Assets Portfolio, which invests in a broad range of global real estate, commodities, natural resources equities, and infrastructure. 

For monthly passive income, there are Income Portfolios available on Endowus. Read more here about how passive investing can form the core part of your portfolio.

To get started with Endowus, click here.