Real estate investment trusts (REITs) have long been valued for the stable dividends and high yields they provide. For many investors, REITs are a simple and cost-effective way to invest in real estate, and an attractive investment alternative to stocks, bonds and commodities.
Institutional investors, too, have been favouring REITs listed on the Singapore Exchange, commonly known as S-REITs. In the first eight months of 2019, S-REITs attracted a net inflow of $311.7 million from institutional investors, reflecting Singapore’s status as the largest REIT market in Asia (excluding Japan) and the S-REIT sector’s importance as a key component of Singapore’s stock market.
Whether you’re an investor eager for high yields or one seeking long-term capital appreciation, here are four reasons to add S-REITs to your investment portfolio.
High Dividend Yield
S-REITs have some of the highest dividend yields across all major REIT markets. What’s more, with major central banks cutting interest rates, yields offered by S-REITs are more attractive than the low or negative yielding options in the bond market. For instance, the average current dividend yield of S-REITs is around 6.5% compared to the 10-year Singapore government bond rate of around 1.7%.
S-REITs have provided investors with long term sustainable total returns. The FTSE Straits Times REIT Index delivered 5-year total returns of 38% from 2013 to 2018. In 2019, it was up close to 20%, almost double the 9.4% in total returns generated by the benchmark Straits Times Index (STI). In an environment of heightened market volatility, the outperformance of S-REITs certainly points to its resilience.
The outlook for S-REITs continues to be positive. Amid a lower-for-longer interest rate environment, S-REITs have been on an acquisition trend. Ascendas REIT recently acquired 30 business parks for S$1.66 billion, a move that will see it diversify into the US from its current markets of Singapore, Australia and the UK. In September 2019, three other S-REITs announced acquisition plans as well. These acquisitions are likely to be yield accretive, and offer potential for greater dividend growth.
In fact, OCBC Investment Research has projected stable DPU growth of 4% for the year ahead. S-REITs in the retail and industrial sector have seen largely positive rental reversion rates and growth in distributions per unit (DPU). Positive rental reversions – the trend of higher rental rates upon lease renewals – is a key indicator used to evaluate the health of a REIT’s leasing activities.
Meanwhile, REITs in the logistics sector are seeing a multi-year structural growth in demand as well. Strong e-commerce growth for instance have bode well for logistics REITs, given the increased demand for warehousing space.
S-REITs offer investors exposure to a diversified portfolio of professionally managed real estate assets. CapitaLand Mall Trust for example, has 15 properties within its portfolio. Compared to investing in single assets such as a condo unit, REITs reduce the concentration risk for investors, which happens when any single investment becomes a significantly large percentage of the investor’s total portfolio.
Furthermore, as REIT managers look beyond Singapore in search of yield-accretive acquisitions, investing in S-REITs offer investors exposure to properties located around the world. An investor in Mapletree Logistics Trust for instance, gains exposure to logistics real estate in eight geographic markets across Asia Pacific. With close to 80% of S-REITs owning properties outside Singapore, S-REITs provide an easy means of geographical diversification.
Investing in S-REITs
Similar to stocks, REITs are listed on the Singapore Exchange and you can invest in them the same way you would in a stock. Before investing in a S-REIT, look at factors beyond just dividend yield. Consider the REIT’s potential growth, and whether the dividend paid out is likely to rise. Think about the quality of the assets within the REIT’s portfolio, the tenant mix and evaluate the track record of the REIT manager.
While S-REITs are not completely immune to global market volatility, they still make good, defensive investments, given the predictability of their lease-based income and regular dividend payouts. In short, this is an asset class that warrants a place in any portfolio.
If you’re keen to get started, consider Syfe’s new REIT portfolio. Offering some of the best SGD-denominated real estate assets in one portfolio, investors can earn high dividend yield while generating passive income.