They are less volatile than wider stock market, suitable for retirees who want regular dividends
Lorna Tan
Invest Editor/Senior
Correspondent
PUBLISHED 8 September 2019
Volatility continues to unsettle markets, but real
estate investment trusts (Reits) remain a sweet spot with relatively high yields
and stable dividends.
Indeed, institutional investors have been turning
away from private equity real estate and infrastructure investment in favour of
liquid funds that put their money to work faster, notes Mr Geoff Howie, market
strategist at the Singapore Exchange (SGX).
Ms Carmen Lee, head of
investment research at OCBC Bank, says Reits are the "star performers" this
year, far surpassing the performance of the benchmark Straits Times Index
(STI).
"Based on the FTSE ST Reit Index, the year-to-date gain is 18.9
per cent. This is outstanding, especially in an environment of heightened
volatility due to trade tensions," she says.
"The 18.9 per cent gain is
also significantly higher than the 2.5 per cent gain for the STI."
Mr
Howie adds that lower interest rates and net institutional inflows have led to
the Reits sector outperforming benchmarks at home and abroad.
He noted
that the iEdge S-Reit Index generated a 22.6 per cent total return from Jan 1 to
Aug 28 this year, with the sector recording net institutional inflows of $287
million. In that same period, six of the 42 trusts listed here generated total
returns above 30 per cent - Ascendas Hospitality Trust, Keppel DC Reit,
Keppel-KBS US Reit, Mapletree Commercial Trust, Lippo Malls Indonesia Retail
Trust and Sasseur Reit.
Reits pool investors' money to invest in a
diversified portfolio of income-generating, professionally managed real estate
assets such as shopping malls, offices, hotels, serviced apartments, and
logistics and industrial parks. The rental revenue from these assets is
regularly distributed in the form of dividends.
Reits make sense for
investors who are retired and dependent on dividend payouts for day-to-day
expenditure. After all, capital preservation is a key objective for retirees as
their portfolios have less time to recover from losses compared with younger
investors, says Phillip Capital Management senior fund manager Tan Teck
Leng.
He adds that they have historically exhibited lower volatility than
the broader equity market, preserving portfolio values during market
corrections.
The Sunday Times highlights 12 things to look out for when
investing in Reits.
1. QUALITY OF THE UNDERLYING PORTFOLIO
Ask if
the properties are in a high-growth sector and location.
Properties in
prime locations are more likely to have stronger incomes and valuations compared
with real estate in poor locations, says Ms Evy Wee, head of financial planning
and personal investing at DBS Bank.
Also consider if the Reits own
properties across various geographies. This may offer more diversification, but
the trusts could face foreign exchange fluctuations as rental income will be in
another currency, she adds.
Mr Victor Wong, senior director and head of
Asean equities at UOB Asset Management, advises that high-quality properties
with diversified, blue-chip tenants will be more resilient during a market
downturn.
2. LEASE EXPIRY OF TENANTS
One key measure is the
weighted average lease expiry (Wale).
This measures the likelihood of a
property being vacated and so provides an indication of how secure the Reit's
income stream is.
A Reit with a short Wale faces a higher risk of vacancy
than one with a longer one, says Ms Wee.
3. MANAGEMENT TRACK
RECORD
A manager with a strong track record will go a long way to ensure
sustainable growth and devise strategies to increase distributions, notes Mr
Wong.
4. STRONG SPONSOR
The sponsor is the controlling company
behind the Reit, and typically also controls the management company. CapitaLand,
for example, is the sponsor of CapitaLand Mall Trust and CapitaLand Commercial
Trust.
"With a strong sponsor, such as a solid property developer, there
is visibility on the future pipeline of assets for the Reit, an assurance of
corporate governance and financial backing in the event of a crisis," says Mr
Tan.
5. POTENTIAL GROWTH IN DISTRIBUTION PER UNIT
A Reit may raise
dividends through asset enhancement initiatives, which are basically ways the
manager converts empty space so it generates returns, or by acquiring other
properties, says Ms Wee.
So consider the frequency and extent to which a
Reit does this.
6. GEARING RATIO
This refers to the proportion of
total debts to total assets. The leverage limit for Reits is 45 per cent, which
means a gearing ratio in excess of that is considered high.
Mr Wong says
that a prudently managed balance sheet with low gearing is preferred so that
there is sufficient debt headroom for acquisitions or development.
"The
debt expiry profile should be spread out to minimise refinancing risk," he
adds.
7. DIVIDEND YIELDS
While the current average dividend yield
is about 6.3 per cent, this can range from 4.6 per cent for data centres to 6.9
per cent for industrial Reits.
It is more appropriate to compare yields
for Reits within the same sectors, advises Ms Lee.
These sectors can be
broadly classified into segments that include office, retail, industrial,
hospitality, healthcare, data centres and others.
8. MARKET
CAPITALISATION
While the average market capitalisation of Singapore's
listed Reits is at around $2.5 billion, it can range from as low as $350 million
to as high as $9.7 billion.
Within the sectors, retail, office and
industrial Reits tend to be bigger, with average market capitalisation in excess
of $2.7 billion, says Ms Lee. Bigger Reits usually have better trading volumes
and tend to be favoured by institutional funds.
9. STATE OF THE
ECONOMY
Stronger economic growth is generally a good thing. However, as
Reits are typically focused on a particular sector, the growth outlook for that
particular industry, including rental forecasts, also matters.
The rise
of e-commerce, for example, is generally positive for logistics Reits as
distributors need warehousing space to store their merchandise, notes Ms
Wee.
10. INTEREST RATES
The general rule of thumb is that rising
interest rates make Reits less attractive as most would have taken on debt that
they have to repay, notes Ms Wee.
During such periods, investors can
consider Reits that have fixed-rate loans, debt that is well staggered and a
high proportion of assets that are not pledged as collateral.
11.
OVERSEAS REITS
Mr Tan says quality overseas Reits can help diversify a
portfolio.
"In particular, we think Asia-Pacific Reits should be
considered, as key Reit markets in this region - Australia and Hong Kong - have
similar or longer histories than the S-Reit market and similarly solid
performances," he says.
"Many will also be more comfortable investing in
regions close to Singapore rather than, say, Europe or the
US."
Australia's Reit market (A-Reits) is significantly bigger and the
longest-running in the Asia-Pacific, having started in the
1970s.
"A-Reits have favourable regulatory environments with deep market
liquidity," Mr Tan adds.
"The Australian superannuation funds (retirement
funds) are among the biggest domestic investors, while A-Reits are also a core
segment for international Reit investors.
"Australian commercial and
industrial properties, where most A-Reits are invested in, have been seeing
strong price growth in recent years given low interest rates and international
buying interest, with industrial and office properties in particular performing
strongly."
One way to invest in Asia-Pacific Reits without the hassle or
challenge of individual stockpicking is to buy into Phillip SGX Apac Dividend
Leaders Reit ETF, which is listed on the SGX.
It buys into the top 30
Asia-Pacific ex-Japan Reits ranked by total dividends paid, which would include
the biggest Reits in Singapore, Australia and Hong Kong.
Launched in
October 2016, the exchange-traded fund has delivered 9.7 per cent net annualised
returns to investors (in Singapore dollars, dividends included), as of the end
of last month.
12. FINANCIAL KNOW-HOW
SGX StockFacts (www.sgx.com/stockfacts) has a number of
screeners that can assist retail investors in their reviews of the Reit
sector.
You can scan by yield, debt/ equity, price/book ratio, size or
market cap, and the Reit's pricing relative to the last four weeks, three
months, six months or 12 months.
Mr Howie suggests that investors study a
Reit's prospectus to understand its investment objective and details of the
properties to be acquired before making an investment decision.
"Aside
from market risks, retail investors should also be considering cost of
refinancing, management fees paid to Reit managers, as well as the geographical
location and quality of the underlying property investments (for example,
concentration of properties and length of lease)," he adds.
OUTLOOK ON
REITS
Mr Derek Tan, head of property research at DBS Group Research, says
Reits will hold up better when volatility hits because they are exposed to the
more resilient domestic consumption (such as suburban retail) and logistics
sectors, which are seeing a multi-year structural growth in demand.
"The
outlook for the Reits sector is still positive, and we estimate that Reits can
grow their distribution per unit (DPU) by about 3 per cent on average," he
notes
"The Reits in the retail and industrial sectors should continue to
see good rental reversion rates and room to grow for their DPUs.
"In the
past year, some of the Reits also carried out acquisitions which are yield
accretive."
UOB Asset Management expects Reits to continue to trade on
higher valuations, given global market uncertainties and low interest
rates.
"Nonetheless, they still offer more attractive absolute dividend
yields and yield spreads compared with 10-year government bond yields, which are
expected to stay low due to central banks in the region adopting an
accommodative monetary stance," Mr Wong says.
Other favourable factors
for Reits include the trend of higher rental rates at lease renewals, as well as
acquisition opportunities which will support an increase in DPU, which will
translate into higher returns for investors, he adds.
