How should you pick the best S-REIT? (Hint: you don't have to)

Learn about the different types of Singapore REITs

Real estate investment trusts (REITs) are a cornerstone of real estate investing for Singaporeans.

REITs allow for smaller investment outlay compared with buying physical properties. The regular Joe is also not only just limited to exposure to residential or commercial property. In Singapore, there are 6 main types of REITs investors can invest in.

Key operating metrics for REIT investments

Just like how profitability and earning metrics are important to investors looking at doing fundamental analysis, it is important to identify operating metrics of a successful REIT for a better chance of getting a profitable investment. 

In general, REITs invest in properties and real estate spaces, earning rental income and management fees. These fees are then passed on to the investor in the form of distribution payouts. Naturally, the more profitable the properties, the higher the distribution yield of the REIT. There are 3 metrics that can be used to evaluate the attractiveness of a REIT. 

Weighted Average Lease Expiry (WALE)

One is the property’s weighted average lease expiry (WALE), which is used to evaluate the strength of a REIT’s leases. WALE is used to measure the average expiry period of all the leases within a property. Instead of calculating the simple average of the lease expiry, REITs often weigh the lease by leasing space or by revenue to give a fairer depiction of the leasing risk faced by REIT investors.

In general, longer WALEs are better, as it reflects greater certainty of future income, and consequently, dividend payout for the REIT.

Occupancy rate

The occupancy rate of a property is the percentage of occupied rooms or spaces on the property at a given time. A rising occupancy rate indicates healthy growing demand for the property's space. 

Profile of tenants

The property’s profile of tenants also plays an important role in determining the profitability of the property. Investors can assess the tenant concentration risk of the REIT. Tenant concentration risk is the over-reliance of a single tenant, or single type of tenant, occupying the entire REIT portfolio. This over-reliance can potentially be detrimental to the REIT if the tenant chooses not to renew their lease. 

Next we identify the differences between various REITs sub-sectors by going in-depth into each REIT sub-sectors.

Hospitality REITs

Hospitality REITs mostly own hotels and serviced apartments. Popular hospitality REITs in Singapore include Ascott Residence Trust (SGX: HMN), CDL Hospitality Trust (SGX: J85), Far East Hospitality Trust (SGX: Q5T), and Frasers Hospitality Trust (SGX: ACV). Most of these hospitality REITs hold properties both in and outside of Singapore.

The performance of hospitality REITs is largely dependent on the number of tourists entering Singapore. Singapore is a popular tourist destination, attracting millions of tourists each year and constantly ranking top 10 in most visited travel destinations. With a constantly increasing influx of tourists, investors can expect their hospitality REIT yields to rise.

However, since travelling is more often than not a discretionary expense, hospitality REITs tend to do badly during economic downturns. Tourism is naturally also heavily impacted by major health outbreaks — such as Covid — geopolitical tensions, or natural disasters.

Hospitality REITs specific performance indicators

Average daily rate (ADR)

The ADR measures the average revenue earned per occupied room in a day. An increasing ADR for a hotel or service apartment can indicate that the service provider is increasing profits from renting out rooms. However, increasing ADR can also signal falling occupancy rates, especially when there is strong competition in the vicinity. Therefore, when evaluating ADR, investors should take into account both revenue and occupancy rates.

Revenue per available room (RevPAR)

RevPAR represents the revenue generated per available room, whether or not they are occupied. An increase in RevPAR means that either ADR or occupancy rate is increasing, or that both indicators are increasing. Since a rise in RevPAR can occur even with falling profits and revenue, ADR and occupancy rate are better performance indicators.

Industrial & Logistics REITs

Industrial REITs own facilities used for industrial purposes, such as warehouses, logistics facilities, and business parks. These spaces can be leased to businesses and manufacturers. With the boom in e-commerce, industrial REITs are key players in helping meet the rapid manufacturing, storage, and delivery demands. Mapletree Industrial Trust (SGX: ME8U), Mapletree Logistics Trust (SGX: M44U), Ascendas REIT (SGX: A17U), and AIMS APAC REIT (SGX: O5RU) are industrial S-REITs.

Industrial REITs are popular as they are deemed to be safer investments, as they support important economic activities. In contrast, commercial properties, such as hotels and retail spaces, are considered luxurious economic activities rather than necessities. 

Data centre REITs

Data centres house computer systems and associated components, such as storage equipment, servers, and firewalls. Data centres are an important aspect of the digital economy, and demand for them has been increasing with the push towards digitalisation globally. Keppel DC REIT (SGX: AJBU) and Digital Core REIT (SGX: DCRU) are pure-play data centre REITs, while Mapletree Industrial Trust (SGX: ME8U), and Ascendas REIT (SGX: A17U) are industrial REITs with some data centre exposure. 

Investors can expect the demand for data centres to remain strong and resilient, driven by heavy demand from hyperscale operators, big tech companies, enterprise spending on cloud infrastructure, and the move towards 5G.

Healthcare REITs

Healthcare REITs invest in hospitals, medical research centres, and nursing homes. Investing in healthcare REITs is attractive due to the ageing population trend — people will fall sick, age, and require healthcare services. Healthcare is a basic necessity for everyone, making healthcare REITs a defensive and resilient investment option. Healthcare S-REITs include Parkway Life REIT (SGX: C2PU) (which holds many private hospitals) and First REIT (SGX: AW9U) (which holds several nursing homes).

With Singapore facing an ageing yet more affluent population with longer lifespans, the healthcare sector will be crucial in meeting the long-term healthcare needs of the population. The demand for healthcare infrastructure — both hospitals and elderly-care facilities — will rise alongside demand for healthcare services.

Retail REITs

Most shopping centres in Singapore are owned by REITs. For instance, Plaza Singapura, Funan, and Bugis Junction are all malls owned by Capitaland Mall Trust (SGX: C38U). Frasers Centrepoint Trust (SGX: J69U) is another popular retail S-REIT, owning suburban malls such as Causeway Point and Tampines 1. SPH REIT (SGX: SK6U) and Starhill Global REIT (SGX: P40U) own retail malls in Singapore and Australia.

Retail REITs are popular among retail investors as the real estate owned is familiar and easy to understand. Investors can also easily head down to the malls owned by the REIT to observe the foot traffic and mall tenants. 

Despite the growth in e-commerce in recent years, retail REITs ranked among the top performing S-REITs in terms of dividend yields in 2021. Some consumers still prefer shopping at brick-and-mortar shops to touch, feel, and try on the items they are purchasing. 

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Commercial REITs

Commercial REITs own and manage office buildings and spaces. Spaces such as Marina Bay Financial Centre, One Raffles Quay, and Suntec are owned by their respective commercial REITs. Popular commercial S-REITs are CapitaLand Integrated Commercial Trust (SGX: C38U), and OUE Commercial REIT (SGX: TS0U). Keppel REIT (SGX: K71U) owns offices in Singapore, Australia, and South Korea.

With work-from-home quickly becoming the new norm, companies are reevaluating the need to own physical working spaces. Co-working spaces are also gaining popularity, especially for smaller businesses, thus eliminating the need for companies to own private office spaces. These factors might lead to a reduction in tenants vying for commercial real estate. 

However, office buildings would likely not disappear completely anytime soon, since many job functions still require employees to be on-site.

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, which are expected to rise in the short term

Why pick when you can have them all?

REITs across sub-sectors perform differently across market conditions. For instance, hospitality and retail REITs might underperform during economic downturns, as people tighten their belts and relinquish luxury spending. Data centre REITs might still show continued growth even during market downturns as the expanding global digital infrastructure will spur more demand for data infrastructure.

The average investor might not have the confidence to cherry-pick REITs to invest in, since real estate is a fairly specialised asset class that requires specific knowledge and a high degree of selectivity. Some investors might also prefer investing in a diversified range of real estate, instead of sector-specific REITs, in order to reduce the volatility of their portfolios. Investors should also note to diversify their portfolio geographically and to stay away from home bias in investing. 

Investing in real estate mutual funds is one way to gain broad exposure to the various types of real estate. Fund managers are able to tactically choose which REITs to invest in for the greatest upsides, especially during times of greater financial volatility. These fund managers undergo rigorous fundamental analysis of the real estate companies in the fund, in order to understand the current and future performance of the company. 

The dispersion in returns by stocks and sectors has increased over time — not all property types are equal, and indices that have outperformed in the past might not continue to do so in the future. Take the growth of e-commerce for example, if you have invested in a global property index at the start of 2017, you would have 30% exposure to retail real estate, and only 10% to industrial real estate. Since then, the industrial sector has delivered 163% returns, compared with the retail sector which declined by 5% over the same period. 

This represents a 25% return differential on an annualised basis.

It might be beneficial for investors to invest in a mutual fund that invests in different real assets. Get started with real estate investing by investing in a globally diversified real assets fund with the Endowus Real Assets Portfolio.