Debate rages over popular S-Reits
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Debate rages over popular S-Reits

Aug 2022
Mar 2022
Singapore real estate investment trusts - property portfolio

S-Reits have been sold down in recent weeks, with many of them hitting their 52-week lows.

Such securities have been offloaded at such speed and magnitude that some brokerages now think investors have sold too much, and too quickly.

Let's explain why the headlines are flashing over this popular asset class in Singapore.

We also unpack how you can gain exposure to them, and why you should not be limited to exposure to Reits in Singapore.

What are S-Reits?

A real estate investment trust (Reit) is a trust structure that invests directly in income-generating real estate.

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

Singapore-listed Reits, or S-Reits in short, tend to pay at least 90% of their taxable income each year to investors as distributions. Doing so lets S-Reits enjoy tax benefits from the Inland Revenue Authority of Singapore (IRAS) 

As most of their operating cash flow is paid out as distributions, this makes buying S-Reit units an attractive way to build a high-income portfolio. The average distribution yield of S-Reits could range between 3% and 9% per annum.

Why do Singaporeans invest in S-ReiTs?

High distribution yield

The high distribution yield, as seen from the chart below, is the key reason that Singaporeans favour S-Reits.

Studies show that retail investors generally prefer getting their investment returns through dividends, over capital gains.

The main reason is that 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 make it cheaper for investors to generate cash flows from their investments, which is especially important for retirement income


Preference for real estate investments

Real estate ownership makes up a huge part of many Singaporeans' net worth. Data from the SingStat Household Balance Sheet Q3 2021 showed that 42% of assets owned in a household are in residential property assets.

Property investments have worked well for earlier generations of Singaporeans, and it is natural for younger Singaporeans to want to invest in real estate as the country becomes more developed.

Familiarity bias

It is seemingly easier for new investors to understand the business model of Reits, because visiting a shopping mall or using healthcare services in a hospital are activities that are highly relatable.

For Singaporeans who are risk-averse, investing in real estate when they can observe or experience the Reit's operating performance first-hand is almost a no-brainer.

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

It also helps that many S-Reits are listed and pay out dividends in Singapore dollars, which makes investing easier to manage.

Click here to learn about the different types of Reits in Singapore and their key operating metrics.

What's the current debate over S-Reits?

If S-Reits are so popular, why have some investors dumped them in recent times? 

That’s because S-Reits are sensitive to changes in interest rates. 

The US Federal Reserve has 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 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 are concerns that the Fed has been too late in reining in inflation; the ongoing Russia-Ukraine war has also meant more uncertainty in the number of rate hikes the Fed will undertake this year. 

Such volatility has scared off uneasy investors. Some fear that Reits will be caught off-guard by more expensive debt that they typically use to acquire properties from which they extract rental income. Higher debt would make their purchases less lucrative.

Since property income is passed on to S-Reit investors via distributions, some investors think that their distributions will be less appealing than before. 

Yet, brokerages such as DBS think that refinancing rates should be manageable. DBS has estimated that a 1% rate hike would only bring headline distribution yields down by at most 20 basis points (0.2%) from the current 6% yield. To add, a 1% hike in interest costs only shows up in a Reit’s performance after 3 years. 

Investors also need to review if S-Reits have been prepared for higher interest costs. 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. 

Read more: Being selective key to passive income amid high inflation

Data from the Singapore Exchange showed that institutional investors have accumulated S$30.4 million in net inflows into the S-Reit sector from 25 Feb 2022 to 3 Mar 2022. Conversely, retail investors have cut their S-Reit exposure by a net S$42.6 million in the same period. 

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.

To be clear, Singapore has been an attractive listing location for Reits, and investors who think S-Reits are attractive now can buy them easily as they are traded on the Singapore Exchange.

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

Lack of diversification 

It's critical for new investors to not just diversify across different properties, which they may be able to get through a Reit investment, but also to diversify across different asset classes, sectors and geographies.

Investors should consider also investing in equities and fixed income, not just Reits, to build a more balanced portfolio.

Also, 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.

size of sreit relative to other global reit markets

Distribution limitations 

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 that they do not have immediate use of.

Investors can opt to receive their distributions in the form of the Reit's 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.

Looking beyond S-Reits for better investment opportunities

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. 

A portfolio of real estate unit trusts, such as those from Endowus Global Real Estate Portfolio, with global exposure and distributions reinvested automatically might be the investment alternative that Singaporeans can consider.

There are also Income Portfolios available on Endowus, offering investors monthly passive income from funds paying out dividends.

Here are some ideas to generate passive income in Singapore. To understand why passive investing should form the core part of your portfolio, click here.

To get started with Endowus, click here.


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