Are Singapore REITs a Good Investment?

This article on Singapore Real Estate Investment Trusts (S-REITs) is long overdue as I already had plans to pen down my thoughts on this topic more than a year ago.

Initially, I wanted to title this post “The Disastrous Singapore REITs Model” but decided otherwise. :D

So why do I think they are a disaster?

A REIT is an instrument that allows small investors to have indirect access to real estate investment at an affordable cost. Through this investment, you will be entitled to a steady stream of dividends (distributions) from the rental income.

Are-Singapore-reits-a-good investmentFrom the developer’s point of view, it offers them a chance to divest of their assets and recycle their capital into new projects.

REITS has been available in other more mature markets prior to the first Singapore REIT listing of CapitaMall Trust (CMT) in 2002. Ascendas-REIT (A-REIT) followed in November 2002 and this was followed by a steady stream of other REITs.

A REIT is intended to be a defensive instrument as it relies on revenues generated from income producing properties held in its portfolio. As rentals are more or less constant, investors are assured of a steady stream of dividends.

A REIT manager earns fees by charging a management fee based on the assets under management (AUM), as well as associated fees for adding/selling properties from its portfolio. The higher the AUM, the more fees he would earn. Needless to say, REIT managers are always on the lookout to grow their portfolio. Which is what many of them did.

It is only possible to justify (to investors) adding more properties to a portfolio if the acquisitions are yield accretive. This means the new properties that are being added to the portfolio must give a higher rental yield than the yield on the REIT itself (at the current stock price).

In 2004 to 2007 when the stock market was booming, many of the REITs were trading at a high valuation and had yields that were quite low. So it was easy for a lot of REITs to go on an acquisition spree using either debt or equity (or a combination of both) to finance their purchases. Some of them used too much debt which resulted in highly geared balance sheets.

As most of the REITs managers were just benchmarking their gearing levels to their peers at that time, everything seemed normal so everyone just concentrated on growing their AUM. Every acquisition was followed by a press release highlighting the good news about how so-and-so REIT has grown and is now bigger. Come reporting time, they could also put a positive spin on the results by reporting higher earnings or distributions (in absolute $ terms) even though there could be just a marginal increase in the distribution per unit (DPU).

Investors are also happy as they were enjoying both their dividends and capital gains from high valuations.

The reality check came in 2008 after Lehman Brothers collapsed. Due to writedowns on the property, many of these REITS discovered that their gearing had become untenable to the banks. It was a very challenging time for them as the debt market was practically frozen up at that time as well.

In the end, most of them with over-geared balance sheets had to raise cash in the form of equity. Raising equity at a time when the share price is low can be very dilutive to shareholders who are not part of the equity raising process.

One example is when you do a share placement to preferred investors.

Another example could be retirees who had invested all their life savings in REITs for the dividend streams and had no more money to take up their Rights issue. Perhaps some of them also didn’t really understand the implications of a Rights issue and didn’t wish to fork out more money to subscribe for their rights.

For those existing investors who could raise the capital to subscribe for their rights, they are returning most (if not all) of the dividends they had collected back to the REIT. Don’t let the discounted price fool you as you are essentially paying just to maintain your percentage shareholding in the REIT.

This is the reason is why I deem Singapore REITs to be a failure. Touted as a defensive investment with a steady income, it has failed to deliver its promise.

However, not all the REITS are failures as there are some exceptions. There are a few REITs that had kept their gearing relatively low throughout the years and did not have to raise any equity during the crisis. While investors in those REITS might have suffered a paper loss in capital value during the crisis, the prices have largely recovered by now.

Long term investors would have been well rewarded with all the dividends they had collected over the years if they did not panic and sell out at low valuations at the wrong time.

The reason why I’m writing this post now is that recently, some of the REITs have returned to the acquisition path again. As their stock prices have recovered from 2008, they can now make yield accretive acquisitions again.

Will history repeat itself?

As an investor, what I am looking for is not a REIT that keeps on growing its AUM. All I really need is one that can manage its existing assets well and not get into any (financial) trouble.

A very good site to track Singapore REITS is this website – SGX REIT Data. It is updated daily with the latest news and provides a comparison of the different REITS including their gearing, dividend yield, etc.

Comments

  1. says

    “For those existing investors who could raise the capital to subscribe for their rights, they are returning most (if not all or more) of the dividends they had collected back to the REIT. Don’t let the discounted price fool you as you are essentially paying just to maintain your percentage shareholding in the REIT. ”

    I strongly agreed with your view on “discounted price fool”.

  2. coffee-o says

    Lion

    Most of the REITs are set up by developers, the REITs help them to divest their assets to the small investors via the vehicle of REITs. The REITs become their ready buyers. The developers become the REIT managers and making decisions to buy and sell assets for the REITs.

    Is there a possibility for the developers to unload their unwanted assets at an unreasonable high price to the REITs and buy the good assets from the REITs at a unreasonable lower price? If yes, who will check the details of the transactions to protect the interest of the small investors in REITs?

    Please advise. Thanks.

    • says

      Hi Coffee-o,

      Yes, it might be possible. But if it’s a related party transaction, shareholders voting might be required.

      At the end of the day, we have to invest with our eyes open and see what they do.

  3. Reitts says

    Hi Lion,

    AIMSAMPI Reit recently announced a 7 for 20 offer. I am a current holder of AIMSAMPI but is skeptical about it.. as mentioned in your article… “discounted price fool…”.. ha…

    Any views or advice on this? Appreciate it… cheers

    • says

      Hi Reitts,

      They have too many interested party transactions (IPT). Don’t really like it. But do note you have to act on the rights (subscribe or sell).

  4. says

    Hello,

    Good article. I actually discovered this site through a web search on Singapore REITS, and what interested me in the topic in the first place was an email update from “The Sovereign Investor” newsletter singing the praises of SREITS. So this being the first time I ever knew of them, I wanted to check it out more carefully.

    So ultimately, they’re pitching three in particular: Suntec, CDL Hospitality and Mapletree. In fact, if possible, I’d like to share the newsletter with you to let you see their view and maybe you can discuss your view in comparison.

    I’ve successfully invested in REITs before here in the States, but never considered internationally. I am hearing and reading good things about Singapore, so this is something I may want to consider in the future.

    That said, I wouldn’t know exactly how to invest in these particular Singapore-based REITs; can you provide some feedback? I’m in the States, so I’m presuming that I would need to get in touch directly with the companies investor relations departments? Please advise.

    Feel free to respond as you have time, I’ll be interested to know your thoughts, and will be happy to forward the newsletter message if you want to supply an email address.

    Cheers,

    Vinnie.

  5. sureesh says

    Dear Vinnie

    I would suggest that you look at K-reit and Ascott reit. The first is an office reit with good exposure to our new business district and the other is a hospitality reit.

  6. SnOOpy168 says

    I don’t really agree with Sureesh’s recommendations.

    Why ?

    For K-reit, refer to the article on K-reit here
    http://singaporeanstocksinvestor.blogspot.com/

    For Ascott – it is trading above NAV with a lower yield. I feel that it is the branding that attracts this premium. It is like asking “Would you like to pay COV for your HDB flat purchase ?”

    There are better choice and yields on REITs.

    Just my 2cents worth. ^0^

    Huat ah.

  7. Joe the Throw says

    So could one tactically benefit from a mix of retail and commercial Singapore REIT’s over the next 6-12 months? Yields as published for the leaders are attractive at 8-9%. BTW, How does one purchase such securities in Singapore-is there a discount broker? Cheers!

  8. wayne says

    i’m an expert reit investor. i would say this because i invested 90% of my wealth in reit from the very first one called CMT. I loved the idea of a share of the real estate. As a result, I have an amazing ride from $1 at IPO to $4.2 at the peak. all from 2003 to 2007. When the stock collapsed in 07, I added more, and more….but it fell and fell.

    I felt it would still go up…one day, so things were ok. Until the day CMT decided to issue rights. one by one, reits started to issue rights, diluting existing shareholders forever. Existing shareholders were screwed big time. They would NEVER be able to recoup! I can’t see CMT returning to $4 for a longggg time. maybe 20-40 years. The so called big feeder developers like capitaland who happily unloaded into reits, now disowned CMT and Capitaretail China, letting them fend for themselves. The then CMT CEO, Mr Pua , think, was a good guy. But he was kicked out (I guess), after all his work.

    After the crisis, CMT and CRCT were useless to Capitaland, so they created Capitamalls Asia. I remember they even advertised their IPO on funan center, which belongs to CMT, i wonder why cmt didn’t sue capitaland for using its similar name. I am not touching anything capitaland, based on their behavior during the bad times.

    I consider myself a verteran now. I lost more than a million SGD on reits. I’ve made it back by exiting reits and entering into other stocks. I think generally reits won’t make the same mistake of being over levered so soon. But in 5-10 years, maybe they will. They are at this time still great for yield. But anything at 4-6% now is too low for me. if interest rates rise, you’ll see yields and share price fall again.

    go for the low levered high yield, but be careful, there are reasons why reits are high yield. if you dont know why, then you haven’t done enough homework, and are asking to be screwed.

  9. so1trg says

    If any of the REITs or Business Trusts were any good, they would not be listed out to the public but milked as a cash cow by their old owners.
    Good example would be PSA; this is a total cash cow for SG and Mapletree. Why list it out and let outsiders share in the profit? Doesnt make sense.

    Many many REITs and Business Trusts have been listed as they have been unloaded by their previous owners having become less profitable (from a margin, point of view). Hutchinson Port Trust and even to a certain extent the Mapletree collection of Commercial, Industrial and Logistics trust.

    Apologies ahead if I am being too blunt here; but it would help if you put yourself in the shoes of a business owner.

  10. Taherah says

    Hi there. Thanks for the article. I know nothing about investment. I went for an introductory talk on how to grow your wealth by a certain renowned person in sg. He mentioned about investing in some Reits like CMT and blue chips and indexes. I dont think i will be attending the whole course though. Would please advise me on how to get started? And what is the minimum investment and brokerage charges?

    • says

      Dear Taherah,

      You can get started by opening an account that allows you to buy stocks from one of the securities firm. Your assigned broker will be happy to answer your questions.

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