12 things to consider when investing in Reits

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.

How interest rate rise affects Reits

Investors may be hit by lower distribution income and a fall in asset values, say BENJAMIN TAN and SHAUN CHIA
 
The Business Times - June 23, 2014
 

How interest rate rise affects Reits
SINGAPORE real estate investment trusts (SReits) have long been identified as an instrument providing decent returns for investors. As with investments in stocks, bonds and properties, SReits are not spared from the effects of the expected rise in interest rates in the market.

The price of SReits have been volatile over the past year, correcting about 20 per cent from highs last seen in May 2013 after the US Federal Reserve announced a scale-back of stimulus which in turn heightened the likelihood of higher interest rates.

SReits then bottomed out in February and have gained about 10 per cent as investors piled back into high yielding assets, the rise coming because of optimism that rates may not rise as quickly as thought.

For investors, understanding the impact of rising interest rates on their investments and what Reit managers have been doing to hedge against rate hikes as part of their capital management is crucial to evaluating Reits as an investment in one's portfolio.

A rise in interest rates can affect Reits in three ways:
* Rising rates increase the cost of debt financing,
* Rising rates cause an increase in expected dividend yield, and
* Higher rates also cause a decrease in the market valuation of the underlying properties.

First, rising rates can lead to higher interest payments on floating rate debt. This ultimately affects what the investor gets in terms of distributions.

As Reits finance their assets by debt, fluctuations in their borrowing rates would have a significant impact on distributable income to investors. On a per-unit basis, this is known as distributions per unit (DPU).

Distributable income is arrived at after deducting interest payments on debt and administrative costs, as well as taxes, from net property income. Sometimes, distributable income also includes a return of capital.

Though interest rates are likely to stay near zero in the short term, it is foreseeable that they will rise over the longer term as the US economy recovers.

Assuming that all other factors remain constant, an increase in financing costs will lead to a drop in distributable income.

To illustrate the impact, let us assume a Reit that has an outstanding debt of $300 million payable at a current floating interest rate of 3 per cent per annum and a net property income of $80 million.

After deducting annual financing costs of $9 million (3 per cent of $300 million) from net property income, and assuming no tax effects or other management expenses, distributable income will be $71 million.

However, if rates rise by one per cent, financing costs will rise to $12 million (4 per cent of $300 million) and distributable income will correspondingly fall to $68 million.

This results in a 4.2 per cent drop in DPU for unitholders.

Second, Reit investors expect a higher distribution yield when risk-free interest rates or government bond yields rise.

The expected distribution yield of Reits is largely determined by the spread above the yields of government bonds that are currently traded.

The average spread between SReit and 10-year government bonds has widened from 3.7 per cent in May 2013 to the current 4.2 per cent.

Given that the yield on a 10-year government bond is about 2.4 per cent, this means the collective basket of SReits trades at an average yield of about 6.6 per cent, compensating an additional 4.2 per cent to investors of SReits.

Capital losses
SReits, after all, are higher investment risks compared to triple A-rated Singapore government bonds.
The widening spread signals the increased risk profile of SReits, as investors require higher returns in order to be adequately compensated for bearing additional risk.

For potential investors, higher spreads are good news. They can invest at higher than expected distribution yields and get a better return on what they invested.

But higher spreads are unfavourable for existing investors who have invested when bond yields and average spreads were low.

As expected distribution yield rises, price falls, assuming DPU remains constant.

For example, a Reit that has an annual DPU of $0.05 yearly and a current share price of $1 has a current yield of 5 per cent.

If its expected distribution yield increases to 6 per cent, new investors will only buy the Reit if it can provide a 6 per cent return.

At a $0.05 DPU, a 6 per cent return can only be provided when the price is $0.83.

This means the Reit's share price is expected to decrease from $1 to $0.83 to reflect the change in expectation of a higher required distribution yield.

Investors may thus suffer capital losses on their investments in the event of an actual interest rate hike caused by an increase in expected distribution yield.

Third, higher rates will decrease the market valuation of underlying Reit properties.

As future cashflows of the properties are subjected to a higher required rate of return due to the increased cost of financing, this will result in a lower valuation of the underlying property portfolio in Reits.

For example, a cashflow of $100 next year at a required return of 5 per cent will be worth $95.24 today and $94.34 at a required return of 6 per cent.

The lower market valuation of property assets can complicate a Reit's ability to obtain refinancing.
As Reits are financed by taking on leverage against the valuation of their properties, a decrease in market valuation will result in a rise in their debt to asset ratio.

This ratio measures the amount of leverage that Reits use to fund their acquisition of properties.
If a Reit was already borrowing close to its stipulated debt-asset limit of 35 per cent for non-rated Reits and 60 per cent for rated Reits, the decrease in valuation for their properties will push them above the borrowing limit.

Their ability to obtain debt financing to purchase new properties, for example, will be impaired as a result.

While the impact of an increase in interest rates may cast a pall over the performance of SReits in the long run, Reit managers have found ways to hedge the near-term impact of an expected rise in financing costs.

This is mainly done to ensure stability in the Reit's cashflows and to reduce its debt to asset ratio so that investors can continue to enjoy a high expected DPU in a well-managed Reit. Some methods include fixing interest rates for a large proportion of debt, increasing the length of debt maturity, and equity placements of new units to reduce debt.

First, some Reit managers have taken steps to hedge the interest rates on their debts through taking on fixed interest rate debt or using financial derivatives like interest rate collars and interest rate swaps to protect against an imminent rise in borrowing costs.

For instance, during Ascendas Reit's full- year results presentation in April, its manager said it targets to hedge 50 to 75 per cent of its interest rate exposure and has fixed the interest rate exposure of 65.3 per cent of its debt to mitigate the impact of rising interest rates.

Retail bonds
The overall weighted average cost of its borrowings at March 31, 2014, was 2.7 per cent, down from 3.3 per cent a year ago.

Ascendas Reit also provided investors with more information on how the rise in interest rates affects distributable income.

In a sensitivity analysis, the Reit manager estimated that for every 0.5 percentage point rise in interest rates, DPU will be reduced by 0.16 cents, or 1.1 per cent, for its financial year 2013/2014.

Second, rather than relying on short-term financing, Reits have taken long-term alternative funding options to meet their financing needs. They can negotiate for a longer-term loan. They can also issue medium-term notes or retail bonds to meet capital requirements and lock in the current low interest rates for an extended period of time.

Longer debt maturity can help ease the uncertainties related to refinancing debt given potentially volatile short-term interest rates.

For example, CapitaMall Trust recently issued $350 million worth of seven-year retail bonds at a relatively low interest rate of 3.08 per cent.

This helped increase the Reit's weighted average debt maturity from about 3.8 years to four years.
Finally, to help reduce the over-reliance on debt financing, some Reits have taken the route of raising capital through issuing new units instead of using debt as a primary financing source.

An example is the recent private placement of 218 million new units by Suntec Reit at the end of March. The new capital was raised primarily to repay existing debt.

Reits have certainly delivered significant returns for many long-term investors over the recent years.
While investors hunt for high-yielding instruments like Reits to grow their wealth, it would serve them well to keep in mind the likely change in the macro environment.

Investors should monitor the actions taken by the Reit managers to mitigate the risk resulting from rising interest rates in order to safeguard their investment.

Benjamin Tan Guo Hui is from Singapore Management University's School of Economics and Shaun Chia Qi Jing is from SMU's Lee Kong Chian School of Business. Both are final-year undergraduates and are student trainers in the Citi-SMU Financial Literacy Programme for Young Adults. Jointly launched by Citi Singapore and SMU in April 2012, the programme is Singapore's first structured financial literacy programme for young adults. It aims to equip those aged 17 to 30 with essential personal finance knowledge and skills to give them a firm foundation in managing their money, and a financial headstart early in their working lives

S'pore Reits may be back in favour

Published on Mar 15, 2014

Their high-yield returns appeal to investors as interest rates stay low

By Goh Eng Yeow Senior correspondent

REKINDLING a love affair can be a tall order when the attraction fades, so analysts deserve some kudos for trying to reawaken the passion investors once felt for real estate investment trusts (Reits).

Their rationale is simple: Reits offer investors an attractive high-yield return when compared with the measly sub-zero interest rates which banks pay savers for their deposits.

Interest rates are unlikely to rise any time soon, even with the efforts of the US Federal Reserve and other central banks to rein in liquidity.

Investors are therefore looking for high-yield assets in which to park their cash again.

One gauge of their growing appetite for risk is the boom taking place in the corporate bond market. Issues such as the recent $200 million five-year bond sold by Amtek Engineering, offering a yield of 6.9 per cent, were snapped up.

The performance of the FTSE ST Reits Index also tells the story of a slow recovery.

At the start of January, it stood at 714. It then fell to a low of 691.63 on Feb 5, as emerging market jitters rocked the local bourse, before climbing back to the same 714 level last week.

Yesterday, it ended 0.65 point down at 712.82.

For many Reits, it is essentially the same story: CapitaMall Trust started the year at $1.905 and sank to as low as $1.81 on Feb 17. It then clawed back its losses, ending flat at $1.895 yesterday.

But Barclays Equity Research analyst Tricia Song said in a note that local Reits are poised for more gains as they play catch-up with Reits elsewhere.

"Singapore Reits offer the best forward yield spreads of 4.8 per cent, compared with Reit peers in Japan which offer 3.3 per cent, US ones at 1.8 per cent, and Hong Kong ones at 2.6 per cent."
Also, local Reits are offering yields of between 0.9 percentage point and three percentage points above their historic averages. "This suggests potential outperformance versus the Straits Times Index in the next three years," she added.

Ms Song had another interesting observation: In the United States, there were six periods in the past 20 years when Reits suffered sharp corrections because of interest rate hikes.

Such corrections were subsequently followed by "periods of strong absolute returns, with the Reits outperforming widely watched market indexes such as the S&P 500", she said.

Given the strong correlation between local Reits and US ones, she believes that the US experience may be repeated in Singapore.

For some analysts, however, the big question is where Reits will get their growth from here on as growth was the big driving factor behind their price surge in recent years.

Goldman Sachs said in a note: "We see rising rates as largely priced in, and we expect investors to focus on the importance of growth fundamentals during the next phase of the market cycle."

In the past 10 years, the catalyst driving the Reits' unit prices higher was acquisitions as they built their property portfolios. But the focus is likely to shift to "topline growth and cost controls" in order to grow revenues. This is because "acquisition-led growth will pose a challenge to Reits, as the cost of their equity goes up with rising interest rates".

engyeow@sph.com.sg

Investing in Reits: There’s No Free Lunch

March 13, 2013

BY BOBBY JAYARAMAN

REITS are all the rage now. It seems there is an initial public offering (IPO) for a new Reit/business trust every other month, the latest one being that of Mapletree Greater China Commercial Trust (MGCCT), which, predictably, had a strong debut in SGX last week.

Amid this euphoria, it is easy for investors to get caught up with yield investing without doing their homework and understanding fully what they are investing in. My intent here is to take a critical look at this new IPO and raise some fundamental questions for the investor to think about.

Sponsor motivation
 First off, it should be noted that MGCCT is not a typical Reit, in the sense that it consists of just two mixed use assets – Festival Walk, a mall in Hong Kong with some office space, and Gateway Plaza, an office building in Beijing with some retail space.

From an investor’s perspective, it is really just one asset – Festival Walk, which makes up 75 per cent of the asset value and gross revenue of the Reit. One cannot help but wonder why Mapletree had to go through the trouble of listing a Reit just to sell a single large asset.

The implication for investors is that their fortunes are tied to the fate of Festival Walk. Given such a high concentration risk, investors had better be sure that they have a good sense of the future earning power of this mall – or they could be in for some nasty surprises down the road.

Festival Walk was a rather quick flip by Mapletree. It had bought it from Swire Pacific, one of Hong Kong’s leading conglomerates, in July 2011 for HK$18.8 billion (S$3 billion) and injected it into MGCCT 18 months later for around HK$20.7 billion, making a profit of around 10 per cent.

It fared much better with Gateway Plaza, its office property which was acquired by Mapletree India China Fund in February 2010 from a Hong Kong-listed Reit for 2.9 billion yuan (S$580 million) and injected it into MGCCT for five billion yuan. This was a more than 70 per cent gain in three years.

Gateway Plaza is now the subject of a lawsuit detailed in the prospectus. As it is, Reit investors have to face enough uncertainties regarding the property cycle, they can surely do without the added headache of a lawsuit.

Anyway, the sponsor has certainly made good returns on these assets. What about investors buying into MGCCT at IPO levels? Will they be rewarded over the medium-long term?

Quality of assets
 To understand this better, let us first dig a bit deeper into the quality of the assets, that is, the long-term earning power of an asset under different economic conditions.

Let us start with Festival Walk, a mall built in 1998 in an upscale suburb of Kowloon. This asset is slightly larger than Ion Orchard, well connected and upscale. It is patronised mostly by local shoppers, with tourists making up only 18 per cent of sales last year, said the prospectus.

The shops there include luxury brands such as Rolex, Bally, Piaget and Armani. Investors would thus need to be convinced of the attractiveness of such a positioning, in which the mall will not benefit much from the onslaught of millions of mainland Chinese tourists who go to malls in the tourist areas of Central or Tsim Sha Tsui; the earnings of Festival Walk will also not be as stable as those of suburban “necessity malls” owned by Link Reit (a Hong Kong-listed Reit).

How has the mall performed over the years? The prospectus says its revenues have been resilient through economic cycles. A graph showing Festival Walk’s gross revenue (without citing a source for the data) and retail sales growth since 1999 supports this.

However, the manager, citing a host of reasons, is unable to provide detailed historical statements of financial performance for the past three years as mandated by SGX.

An investor is free to draw his own conclusions. I would personally like to see verifiable hard data on net property income (NPI), rather than high-level gross revenue and sales numbers, which can be increased in a variety of ways without benefiting the bottom line, such as by spending heavily on marketing and promotion to attract tenants.

Another important point to note is that the mall’s lease expires in 2047, or in just another 34 years, similar to that of many industrial properties in Singapore. Investors need to form a view on whether the dividends are in fact part capital repayment.

Finally, the mall was built in 1998, and would need to be refurbished in a major way if it is to remain competitive with newer centres. This would require heavy capital expenditure.

Let us move on to Gateway Plaza in Beijing. The office building is in a good location with high-quality tenants, but with no direct access to a subway station. The nearest one is a 700m walk away – quite a disadvantage for a prime office building, in my view.

The office sector in general is highly volatile and the Beijing office sector more than bears this out. After hitting a trough in 2009, office rents in Beijing have doubled over the past three years. They are now the third highest in Asia after Hong Kong and Tokyo, and command close to a 50 per cent premium over Shanghai.

The Beijing office market today seems to show similarities to the roaring early 2008 Singapore office market. The problem is that office rentals cannot go sky-high. Today’s cost-focused companies show great resistance to paying high rentals and have the option of moving to less centralised locations. Sooner or later, supply comes up to match, and frequently exceed, demand.

Given these realities, investors need to decide what the upside is in this stage of the office cycle. The sponsor certainly got the timing right buying in during early 2010, just when the market was turning, and selling after rentals had doubled. Investors hoping for increased rentals and capital gains from these levels may not be as fortunate. Gateway Plaza is also on a short lease, with just 40 years remaining.

Leverage
 Leverage plays a key role in determining a Reit’s level of risk, distribution yield and valuation.

As at IPO, MGCCT had S$4.3 billion in assets (the combined valuation of Festival Walk and Gateway Plaza) and S$1.78 billion in debt (net of S$132 million in cash). That gives it a gearing of close to 42 per cent.

Given the reliance of the Reit on cash flows from mostly one asset and currency risk – the Hong Kong dollar has depreciated close to 20 per cent against the Singapore dollar in the past three years – the gearing looks to be on the higher side.

As a comparison, S-Reits have no currency risk, a more diversified pool of assets and a track record going back several years. As at end December last year, CMT had a gearing of 36.7 per cent; CCT’s gearing was 30.1 per cent, and FCT’s, 30.1 per cent.

In today’s environment of ample and low cost funding, debt levels have taken a back seat to dividend yields, but smart Reit investors would do well to remember that the credit taps are extremely volatile and Reits that are dependent on high debt levels and low cost funding to generate returns will pay heavily when the credit cycle turns against them.

Valuations
 Festival Walk and Gateway Plaza have been injected into the Reit at S$4.3 billion. However, there is not much information in the 700-page prospectus on the basis for these numbers.

The valuation reports mention that they use an income capitalisation approach and discounted cash flow (DCF) analysis to value the assets. There are also plenty of standard clauses and disclaimers in the report, but important information such as the capitalisation rates used, the year for which net income is capitalised and the discount rate used for DCF valuations is missing.

More than a decade ago, Singapore’s first Reit CMT put out a 300-page IPO prospectus including this information clearly in a table. It looks like while the IPO prospectuses have been gaining bulk over the years, the quality of meaningful information is decreasing.

Going through the prospectus, it appears that the key operating number is the “projection year 13/14? NPI of S$185.7 million. Dividing this NPI by the asset valuation of S$4.3 billion gives us a property yield of 4.3 per cent. The distribution yield of 5.6 per cent at IPO price is higher than the property yield due to the 42 per cent leverage used.

Over the past couple of years, commercial property cap rates have been compressing all over Asia, with top retail spaces in Hong Kong even trading at cap rates of less than 2.5 per cent.

Investors, however, need to decide whether today’s benign interest rate and credit environment will continue and if such levels of valuation provide a sufficient margin of safety over the long term.

The sponsor makes some optimistic projections on rental increases in the coming years without providing a clear rationale. Investors would do well to test the reality of these projections under conservative scenarios.

Management fee structure
 One of the major attractions of MGCCT, going by the press coverage, is the DPU-based fee model rather than the traditional asset based fee structure that most S-Reits use.

There are certainly major drawbacks to an asset based fee model that a DPU-based model avoids. However, it does not mean that a DPU-based fee model completely aligns management and unit holder interests. For starters, investors should keep a close eye on the leverage and debt maturities. Why?

In today’s credit environment, one can borrow at around 2 per cent and make even a 3 per cent cap rate acquisition yield accretive, thereby increasing DPUs and generating higher fees for the Reit manager. The increased DPUs for the investor, however, come at the expense of higher leverage. (MAS rules allow up to 60 per cent gearing if a credit rating is disclosed.)
This method gets even more attractive if short-term debt is used instead of long-term debt due to its much lower cost. Though this would mean having to frequently roll over debt.

Any Reit that employs such methods can earn high fees through increasing DPUs, but set itself up for disaster owing to a deteriorating capital structure.

This is not to suggest that MGCCT or other Reits will behave in such a way. The point is that no fee structure is fool-proof. Ultimately, whether a Reit ends up creating long-term value for unit holders depends on the quality and integrity of its manager.

Conclusion
 Investing in Reits is no different from investing in any other asset class. The fundamentals need to be sound and the pricing should be reasonable. Investors get a relatively high yield from Reits because they take on the asset price risk.

The writer is a private investor and author of the local bestseller ‘Building wealth through Reits’.

This article first appeared on http://www.businesstimes.com.sg/specials/executive-money/investing-reits-theres-no-free-lunch-20130313

Tips on evaluating a Reit

The Business Times
Cai Haoxiang
24/2/2014

JUST as people are judged by what they wear and how they look, real estate investment trusts (Reits) are usually judged by their yields and net asset values (NAVs). This is an overly simplistic approach that can catch investors off-guard when a Reit turns out to be riskier than they thought, or when professional valuations of properties implied by the NAV change drastically when economic conditions and market sentiments turn.

Yield, or more precisely historical yields here, refer to the distributions per unit a Reit paid investors in the past year divided by its current share price. NAV refers to the most recent valuations of the Reit's assets minus its liabilities like debt. Investors tend to look at whether a Reit's share price is trading at a premium or discount to its NAV per unit to see if there is scope for price appreciation.

High yields do not mean a Reit is an attractive buy, however. Yields are related to risk and growth potential, as investor Bobby Jayaraman pointed out in his 2012 book on Reit investing, Building Wealth Through Reits. The safer the Reit and the higher its growth potential, the lower its yields will be. This is because high demand from investors for these assets pushes up their price, thus lowering yields.

At a price of around $1.90 per unit and 10.27 cents per unit paid out in 2013, CapitaMall Trust (CMT) is trading at a yield of just 5.4 per cent, meaning investors get paid $5.40 out of every $100 invested every year, assuming distributions stay constant.

This seems low now compared to other Reits. But it was even lower. Last May, before the Reit market took fright at the withdrawal of monetary stimulus by the US, CMT was trading at a historical yield of just over 4 per cent. The market was happy to pay 4 per cent not only because CMT is seen as stable but also because CMT had shown a repeated ability to increase distributions year after year. CMT's 10-year return is about 10 per cent a year if dividends are reinvested, according to Bloomberg.

Think of a Reit's yield as the inverse of the price to earnings (PE) multiple that investors are willing to pay for companies: investors are happy to pay 50, 70, even 100 times historical earnings for a fast-growing company if its profits can double each year for the next few years.

More growth potential

Similarly, with low interest rates and risk-free 10-year Singapore bonds trading at yields of 2.5 per cent, investors are happy to get what extra yield they can by buying a steadily growing Reit at yields of 5, 4.5 or even 4 per cent.

Thus, low yields can reflect a Reit with more growth potential than its peers. A Reit can also trade at low yields also because it is seen as less risky, and thus less vulnerable to price fluctuations. Since tapering fears began last May, CMT prices have fallen about 20 per cent from their pre-taper fear highs. By contrast, Lippo Malls Indonesia Retail Trust, another Reit with shopping malls but based in Indonesia, had seen its price fall over 30 per cent. Its 2013 distributions were 3.25 cents, giving a yield of over 8 per cent now.

Why is the market now willing to pay 5-plus per cent for one Reit and 8 per cent for another? Both have shopping mall assets, which are theoretically more resilient to economic downturns than hotels or commercial properties.

But Lippo Malls is perceived to be riskier than CMT as Indonesia has faced capital outflows in the past year, and its currency had depreciated by some 20 per cent against the Singapore dollar. This translates into lower income for Singapore investors. Currency risk is hedged, but this incurs additional costs. Lippo Malls' debt is also denominated in Singapore dollars, and it has to hedge its income flows to ensure its Indonesian income can be converted back to the more expensive Singapore dollar.

Lippo Malls also borrows at a higher cost compared to CMT. It is borrowing at interest rates of 4-6 per cent. Last November, it placed out close to 250 million new units to investors, raising $100 million to strengthen its balance sheet and refinance debts. Raising equity is costly and dilutes the stake of existing shareholders. By contrast, CMT recently borrowed $350 million from investors at a cost of just over 3 per cent.

Annual fluctuations

Higher yields thus do not necessarily make Lippo a more attractive buy, just as lower yields do not make CMT a bad buy.

Lippo is also trading at a discount to its NAV, while CMT is trading at a premium. The argument for buying a Reit that is trading at a discount to its NAV is that over the long run, Reits generally trade at the value of their assets. This makes intuitive sense, because in a situation of stable economic growth, a Reit should be able to sell its properties at just about what they are valued at.

But keep in mind that NAVs fluctuate every year as Reit properties are revalued. Since Reits do not buy and sell properties every other day, Reits with particular characteristics can also trade at a permanent premium or discount to their NAVs, just as consumer and healthcare stocks generally trade at higher PEs than, for example, manufacturing stocks.

On what basis are properties valued? Let us take a look at the notes to the 2013 financial statements of AIMS AMP Capital Industrial Reit. "The valuations of the investment properties were based on capitalisation approach, discounted cash flow (DCF) analysis and direct comparison methods," it said. In both the capitalisation approach and the DCF approach, income is divided by the cap rate or the discount rate to come up with a value. But the final value is very sensitive to what rates are used. The rates used depend on what kind of growth and risks valuers ascribe to the properties.

As for direct comparison methods, when property is compared to recent equivalent transactions, value tends to be overstated during good times.

Valuation is not an exact science. Looking at yields and NAVs is a start. But what makes a good Reit investment goes beyond these two superficial measures. It takes time to know a person well enough to make an assessment of his or her character. Investors should thus also observe the actions taken by a Reit over a period of time before deciding whether it is a good investment at its current yield and NAV.

Understanding Reit structures

The Business Times
Cai Haoxiang
24/2/2014

LAST week, we covered the basics of why investors buy property. To sum up, property investments offer capital appreciation, rental income streams and diversification. Investors also derive pleasure from owning a piece of space.

Buying residential property in Singapore for investment purposes requires a large sum of capital. Properties are generally illiquid and difficult to sell quickly. The multiple measures put in place by the government to cool the market in the last few years also impose costs and limitations on investors. Rental yields, after deducting costs of debt and maintenance, might just amount to a few percentage points a year.

Real estate investment trusts (Reits), on the other hand, offer investors a yield of 5-8 per cent currently. They are easily traded on the stock market. Investors just starting out might find Reits a more attractive proposition than buying their own physical property to rent out.

Before jumping in, investors have to understand the nature of Reit company structures and how they differ from other commonly traded structures such as bonds and stocks.

In Singapore, Reits are divided into shopping mall Reits, office Reits, industrial Reits and others such as hotel, hospital and residential property Reits. The price and yield of each type of Reit are affected by different factors.

Today's article will focus on the Reit structure itself and why Reits have become popular with both buyers and sellers alike.

Why do Reits exist?

While stocks and bonds have been around for hundreds of years and wealthy families have owned land and property for generations, Reits were only first introduced in the US in the 1960s and Australia in the 1970s.

This financial innovation helps investors by breaking up large pieces of property into smaller, easily bought and traded chunks. Reits were introduced in Singapore in 2002, with the listing of CapitaMall Trust. Since then, the number of Reits here have grown. Currently, there are 26 Reits on the market.

Reits allow companies to park their income-generating real estate assets within a financial structure that gives them tax advantages on the rental income received. Individual investors will also not be taxed on the dividend income that they get from Reits. To qualify for these tax advantages, Reits have to distribute at least 90 per cent of their income to their investors.

Essentially, most of the money that a Reit generates from renting out its properties will end up in the pockets of its investors. This is why Reits generally have higher yields than stocks of companies, which generally retain profits for growth purposes. Reits should thus not be looked upon as growth stocks, and investors should not expect them to double in value every year. But they can expect steady dividends.

Companies like to sell their income-generating property assets to Reits. By doing so, they "unlock" or monetise the value of their property, getting a tidy sum from Reit investors to reinvest for their own growth. Companies tend to own a portion of the Reit that they sell their properties to, so they can still enjoy a stable source of income even after they sell their properties.

The relationship between the company that sells the property to the Reit and the Reit itself is important to understand, as conflicts of interest may arise.

One of the hallmarks of a good Reit is having a strong "sponsor" company that can continue to feed the Reit with a pipeline of cashflow-generating properties in years to come. It is a win-win situation for company and Reit: a property developer, for example, can monetise its mature assets while ploughing money back into more development projects; the Reit has a stable growth outlook as investors know which properties might potentially be brought in; if the sponsor is financially strong, the Reit is also more financially stable and can borrow at a lower cost.

What remains to be seen are the terms of the deal, that is, whether a company sells properties to its Reit at a fair price, or whether it is just taking the chance to sell its lower-quality buildings to unknowing Reit investors while holding on to its best properties.

Reit investors look out for "yield-accretive" acquisitions. This means that the costs of debt or equity incurred to pay for the new property will be outweighed by the rental income received, such that the Reit unitholder will see an increase in his or her distributions per unit.

Some Reits in Singapore have sponsors that are developers. Property development giant CapitaLand, for example, is backing the various Reits that bear the CapitaLand name: CapitaMall Trust, CapitaRetail China Trust and CapitaCommercial Trust. Two malls of Frasers Centrepoint Limited could potentially be injected into the Reit it is sponsoring, Frasers Centrepoint Trust, at some point. They are Changi City Point and Centrepoint.

Mapletree Investments, a property group wholly owned by Temasek Holdings that has a property development arm, is sponsoring four Reits: Mapletree Logistics Trust, Mapletree Industrial Trust, Mapletree Commercial Trust and Mapletree Greater China Commercial Trust.

Business park developer Ascendas, formed from a merger of two JTC subsidiaries in 2001, has one Reit, Ascendas Reit, a stapled security Ascendas Hospitality Trust, and a business trust, Ascendas India Trust.

Other Reits have sponsors that are more like landlords instead of developers. The sponsors buy and sell property assets from third-party sellers. Real estate fund manager ARA Asset Management, itself an affiliate of Hong Kong's Cheung Kong Group headed by billionaire Li Ka-shing, partnered logistics firm CWT Limited to list Cache Logistics Trust, a Reit that owns warehouse properties. The Cheung Kong Group also sponsors Fortune Reit here, a Reit that holds retail properties in Hong Kong.

ARA Asset Management, meanwhile, manages Fortune Reit, Cache Logistics Trust and Suntec Reit.

Who runs the Reits?

Reits in Singapore are typically managed by a subsidiary of the sponsor. For example, Keppel Reit is managed by Keppel Reit Management Limited, a wholly owned subsidiary of developer Keppel Land Limited.

The CEO of the Reit manager is responsible for setting the overall direction of the Reit. There is no Reit CEO. This is a point that can confuse people looking at the financial statements and press releases of Reits for the first time, as mentions are always made of the CEO of the Reit management company, instead of the CEO of the Reit.

Responsibilities of the Reit manager, otherwise known as the trust or asset manager, include optimising the Reit's capital structure and identifying assets that can be acquired or sold, as well as planning initiatives that would enhance the value of the properties.

The property manager, meanwhile, is separate from the Reit manager but is also often a subsidiary of the sponsor. SPH Reit, for example, is managed by SPH Reit Management Pte Ltd. But its properties Paragon and Clementi Mall are managed by SPH Retail Property Management Services Pte Ltd.

The property manager provides "on the ground" services such as collecting rental payments from tenants, implementing marketing and promotional programmes, ensuring that floors are swept clean and leaking pipes fixed, and so on.

Fees are charged by the trust manager as well as the property manager. Together with finance costs, utilities costs and property taxes, these charges account for a major part of a Reit's operating expenses.

To get an idea of how much managers charge, let us take a look at the fees charged by the recently launched SPH Reit, which are typical of the industry. The trust manager will get 0.25 per cent a year of the value of deposited property as a base fee, and 5 per cent a year of SPH Reit's net property income in the relevant financial year. In addition, the manager will be paid an acquisition fee of 0.75-1 per cent of the price of properties that it acquires and a divestment fee of 0.5 per cent of properties sold.

The property manager, meanwhile, will get 2 per cent a year of gross revenue of the relevant property, 2 per cent of net property income, and another 0.5 per cent of net property income in lieu of leasing commissions.

Fees can generally be paid in either cash or units.

Aligning incentives

Fees can be a sticking point for unitholders, who argue that incentives of managers are not aligned with them. This is because the more properties are acquired, the higher the revenue and net property income will be and the more fees will rise.

There is no guarantee that additional properties acquired will be yield-accretive and generate a better return for unitholders. In good times and bad, the performance fee will still be paid out as a percentage of net property income.

However, it can also be argued that if a Reit is not managed well, the value of their properties will fall, which will also affect fees.

OUE Commercial Reit (OUE C-Reit) has an interesting way to address the issue that another Reit, Mapletree Greater China Commercial Trust, offered last year. OUE C-Reit's trust manager charges a base fee of 0.3 per cent of the value of gross assets. Then, instead of charging a percentage of net property income for its performance fee, OUE C-Reit charges performance fees based on whether its distributions per unit (DPU) will increase. The performance fee payable is 25 per cent a year of the difference between the DPU of a financial year with the previous year, multiplied by the weighted average number of units in issue for the year. The fee is payable if the DPU of the current year is more than the DPU of the immediate preceding year.

For example, if DPUs increase by one cent, and there are one billion units issued, managers get a $2.5 million performance bonus.

In other words, the Reit manager is only rewarded if the Reit benefits investors with higher DPUs. If distributable income increases but equity is diluted, Reit managers will not be rewarded.

However, this structure might also reward managers handsomely if DPUs plunge one year and recover sharply in the next. They might not get a performance fee for the year that DPUs plunge, but they will get paid for performance in the following year, even if DPUs only recover back to what they were the year before.

To sum up, investors should think about Reits as property assets, not companies. They are not fast-growing companies, but Reits can still grow by increasing their rental incomes every year through various means and by acquiring properties at good prices. Well-run, financially strong Reits will provide steady streams of income for many years to come. They have a place in every portfolio.

A smart way to property investment

The Business Times
Cai Haoxiang
17/2/2014

PROPERTY investing has always been popular in Asia and especially in land-scarce Singapore. The common conception of how one can invest in property is often limited to buying a Housing Board (HDB) resale flat or a private condominium.

For the beginner investor with limited capital, a condo unit might not be the best type of investment to start out with. The downpayment for a suburban condo is likely to be at least $150,000. One takes on substantial debt of up to 80 per cent of the value of the property. The private property market, too, is showing signs of a market top. Rental yields have fallen while prices have risen.

The government's cooling measures also mean that most young people will only own one investment property for some time. This makes diversification difficult, but putting all of your eggs in one basket is risky.

By contrast, the publicly traded equity market offers more options. Property development companies, which buy land, build units and sell them off, are one way to get exposed.

A relatively recent innovation in Singapore is the real estate investment trust (Reit). Investors can buy small ownership chunks of portfolios of shopping malls, office buildings or industrial factories and warehouses. For example, one lot of CapitaMall Trust (CMT), the oldest Reit and biggest in Singapore, goes for about $1,800.

The publicly traded Reit market has suffered considerably since last May. Prices for Singapore Reits have corrected by around 20 per cent since fears of rising interest rates left financial markets shaken. Reit prices may very well correct further, depending on how high interest rates go.

This article will touch on why people buy property and outline the characteristics of the investment class. It will also discuss how buying a residential unit differs from buying a Reit. A future piece will elaborate on Reits specifically, and how to value them.

Why buy property?

The reasons why people buy property in general also apply to Reits. There are four main reasons to buy any sort of property: diversification, capital appreciation, rental income and as a hedge against inflation.

Property prices do not move up and down together with other asset classes such as stocks or bonds. This means that if you hold property together with stocks, for example, the overall fluctuations of your portfolio are reduced. You can sleep soundly at night knowing that your net worth is unlikely to change much on a daily basis, compared to the return you can get.

Capital appreciation comes about because Singapore is a relatively land-scarce country. If demand for land outstrips supply, prices are likely to rise. In the last 10 years, average property prices have doubled. This works out to an average yield of more than 7 per cent a year.

Retirees also like to hold property because of the rental income they provide. HDB flats and condos can be leased out to tenants on a long-term basis of six months or more. The Urban Redevelopment Authority's (URA) guidelines also state that the maximum number of occupants in a residential unit is eight, no matter how big the unit is, and each occupant should have at least 10 square metres of space.

Finally, property is regarded as a way to protect against inflation, or rising prices. When prices in an economy go up, rents and property values might also go up.

Residential properties versus Reits

Similarly, the value of a Reit's properties has the potential to appreciate. The Reit can then choose to sell the property and buy another one with a greater potential for growth.

The rental income a Reit collects and distributes to unitholders can also increase over time. Here, a key statistic to look out for is a Reit's occupancy rate. If you have a condo with three bedrooms, you want to make sure that all three rooms are rented out. Similarly, because Reits own large properties such as shopping malls or office buildings, they have to maximise their rental income.

Because of the potential for both capital appreciation and a steady stream of rental income, properties and Reits in particular are said to take on the characteristics of both stocks and bonds. Reits have high liquidity as they are divided into many tiny units which are traded like stocks. They also have bond-like characteristics because of rental payments from tenants. Just as a bond promises its holder a fixed sum of income twice a year for say five to 10 years, tenants pay rentals every month, and sign long-term leases to do so. One way to value a Reit is therefore to calculate, in today's terms, a stream of projected rental payments going into the future.

The risk of a Reit is also somewhere between that of a stock and a bond. Bonds are thought of as low-risk, low-return investments, while stocks offer higher risk for higher returns. Because they take on the characteristics of both, Reit prices should theoretically not fluctuate as much as stocks and offer investors a decent yield. This might make them good diversifiers to a portfolio.

Both Reits and residential property have similar features which potential investors would do well to take note of.

One characteristic relates to the use of debt. Property buyers generally take out loans to finance their purchases. If they can borrow at a lower interest rate than the yield they generate on their property, they will make money. Interest rate increases eat into their profits if they have to refinance their loans at higher rates.

The higher one's borrowings and the more one pays in monthly mortgages relative to one's income, the riskier the investment is. If you cannot service the property mortgage payments for whatever reason, the bank that lent you the money will have the right to claim the property and sell it off, because the property was used as collateral for the mortgage. This legal process is known as foreclosure.

Property prices are affected by the general economy. If an economy slows down or goes into recession, leading to retrenchments, some people will not be able to service their monthly mortgage payments. They might then be forced to sell their properties at a discount to repay a portion of their loan to the bank. This is known as a distressed sale. If there are many distressed sellers in the market, property prices are likely to fall. Even those holding on to properties which they have already paid off will see the values of their homes plunge.

Credit rating

Similarly, Reits borrow from banks or private investors to finance their purchases. They can also go to equity holders, but the cost of doing so is typically higher. Reits can borrow up to 35 per cent of the value of their property, and go up to 60 per cent if they obtain and disclose a credit rating from Fitch, Moody's or Standard and Poor's.

Reits typically borrow through short-term loans of a few years, and roll over their debt after the loan period is up by getting a similar loan at the prevalent market rate. In the 2008-2009 global financial crisis, financial markets feared that an economic downturn would cause tenants to go out of business and default on their rental payments. If that happened, Reits would face lower income streams and would not be able to refinance their debts. Many Reits were thus trading at extremely low valuations as investors wondered if they would go bankrupt.

An investor should therefore scrutinise the debt levels of a Reit and ask if they are sustainable. Some Reits are better placed to weather market downturns than others. In a sustained economic downturn, people might still need to shop for necessities, so shopping mall Reits might still perform well. But an office Reit might not if enough businesses decide to close shop or move somewhere cheaper.

Illiquid property

Another major characteristic of property is that it tends to be illiquid. This means that property cannot be easily disposed of. This illiquidity is due to the complexity of most property transactions, as well as the large values involved. To sell a unit without making a loss, one has to find a buyer who can pay more than what one bought it for. This is a process that can take weeks or months. In a weak market, like now, it might be difficult for an average property to fetch a good price. Even if you lower the selling price of your condo, for example, it takes time for the buyer to evaluate whether the price is worth paying, relative to other options he or she has.

By comparison, Reits and stocks of large corporations can easily be sold on the public market at any point of the economic cycle, with brokers and traders standing ready to take a position. If one desperately needs the cash, one would find it easier to liquidate a Reit investment than a property. The underlying property might still be illiquid, but the Reit itself is not.

A final characteristic of property investments is the management and maintenance costs which are required. If you own a condo for investment, you have to spend time and money advertising or sourcing for tenants, negotiating rental contracts, collecting rental payments and fixing property defects. If the property you own is old, you might need to spend money to renovate it so it will be more attractive to tenants.

On the other hand, a Reit employs an agent to help it manage the property. This is advantageous in a way. You do not have to worry about ceiling leaks or ageing facilities at a mall or office property when you buy units in a Reit. A professional manager will do it for you. Of course, the fees they charge have to be reasonable and free of conflicts of interest. Fee structures are disclosed in the Reits's annual report. We will discuss this in a future article.

The best managers will be able to add value to their properties through asset enhancement initiatives, or AEI for short. They can, for example, improve the layout of a mall to increase shopper flow. They can change the tenant mix, taking out unprofitable shops. Profitable tenants mean that Reits have the leeway to increase rentals, for example. Mall managers can also subdivide their space more efficiently to maximise rentals - witness how common spaces in malls are being used for promotional events now.

In short, property investments are usually classified as alternative investments, as opposed to the traditional classes of stocks and bonds. They can take on the characteristics of a growth stock during certain times, and offer the steady income streams of a bond in others. Those who cannot afford a condo but still want an instrument that gives a stream of income can think about getting a Reit first.

haoxiang@sph.com.sg

Asian Reits 'do better than equities, bonds'

Published on Jan 28, 2014


ASIAN real estate investment trusts (Reits) demonstrate better longer-term total return performance than equities and bonds, according to a new report issued by the Asia Pacific Real Estate Association (Aprea).

In the January issue of its real estate index bulletin, Aprea said the latest data suggests that over the longer term - three years and more - Reit total return performance in Asia exceeds that of equities and bonds.

Annualised three-year rolling returns for Asian listed real estate companies overall have been 7.33 per cent and 8.2 per cent for Reits.

Asian equities achieved 3.77 per cent and bonds 2.4 per cent.

All major Reit markets in the region have outperformed equities and bonds over the longer term. The leading performers over this period have been Hong Kong (a five-year rolling return of 29.72 per cent), Singapore (26.71 per cent) and Malaysia (20.01 per cent).

In the same period, equity returns were 12.55 per cent and bonds, 5.55 per cent.

Last year, the outstanding overall Reit performance came from Japan, with total returns of 15.98 per cent, significantly ahead of all other markets and also equities and bonds.

Aprea chief executive Peter Mitchell said the research points to the value of Reits as an investment for "mum and dad" investors and institutions such as pension funds, looking to take long- term positions with their savings.

"The outperformance of Reits against equities and bonds over the medium term demonstrates the appeal of the Reit model," said Aprea chairman Lim Swe Guan.

"Total return of the sector has been underpinned by high income yield which also provided stability during periods of market volatility," he added.

Take a hard look at Reit sponsors

Published on Aug 19, 2013

Beware of those that jump on the bandwagon but lack strong brand

By Goh Eng Yeow Senior Correspondent

FOR yield-hungry investors, the big draw with real estate investment trusts (Reits) is their headline- grabbing projected dividend yields.

But one lesson which many investors have yet to grasp fully is that the eye-catching high yields offered by Reits do not come risk-free - especially for Reits with sponsors that are relatively unknown in Singapore's corporate landscape.

Reits are "closed-end" funds that operate in a similar manner to unit trusts.

But unlike unit trusts, which raise funds to invest in shares, Reits specialise in income-generating real estate assets, such as shopping malls, offices, industrial buildings and warehouses.

As a Reit is structured like a unit trust, its assets are held by an independent trustee.

But the trustee does not manage the assets.

That job is handled by a separate management company.

What makes Reits attractive in Singapore is their tax-efficient structure.

In order to be exempt from paying any income tax, Reits have to pay out at least 90 per cent of their income as dividends.

Individual investors are also exempt from paying tax on the dividends they receive.

That makes Reits the perfect corporate vehicle to raise cash for companies that want to divest themselves of their real estate assets, which generate steady income but lack a sexy growth story.
In such an instance, a company may set up a Reit to hold the assets it is selling.

The Reit will then finance the purchase of those assets through an initial public offering (IPO), with the original company retaining a substantial stake as the Reit's sponsor.

But here lies the catch: As far as some Reit sponsors are concerned, they are simply shareholders like any other investor, collecting income from the Reit in the form of dividends.

If the Reit gets mired in any corporate malfeasance, the only possible recourse for an investor is to seek redress from the management company set up by the sponsor to manage the assets.

However, Reit management companies are often thinly capitalised, with many having a paid-up capital of only $1 million each.

This is unlikely to be an issue for investors in Reits that ultimately enjoy the backing of well-known sponsors. CapitaLand and Singapore Press Holdings are among the Reit sponsors included in the Straits Times Index of blue-chip companies.

But as more and more Reit IPO hopefuls make a beeline here, with the bulk of their assets outside Singapore's jurisdiction, some market watchers would like the sponsor - rather than the Reit manager appointed to manage the assets - to be ultimately answerable for any mis-steps that may occur.

This is to safeguard the sterling reputation that Reits have painstakingly built up here, turning Singapore into a destination of choice for investors planning to invest in such instruments.

One corporate lawyer noted: "A number of transactions now have sponsors with unknown names with no financial substantiveness relative to the size of the IPOs which they have launched."

Another worry is that a company may use a special purpose vehicle as the sponsor to get the Reit off the ground, only to wind it up after it distributes the IPO proceeds to its shareholders.

The lawyer said: "Surely this isn't the best position for the retail investor. For corporate governance and investor protection, the sponsor who reaps all the benefit of the IPO should step up and be liable for any misrepresentation that may occur."

This harks back to a point often raised in this column - that investors should look beyond a Reit's mouth-watering yield and check out its sponsor's financial health and ability to inject fresh money into the Reit if it is hit by a credit crunch.

Sure, Reits are enjoying a boom right now, with high rents and low loan-servicing costs.

But there was a brief period in 2009 when there was a real worry that banks might be unwilling to roll over the huge sums owed by Reits to finance their property purchases as the global credit crunch hit Singapore.

Since then, Reits have not become any less immune to such a threat. In May, their share prices fell by as much as 18 per cent on concerns that the US central bank might tighten the ample credit it has unleashed on the world's banking system.

As such, it may be timely for investors to tackle the question of whether sponsors should take on more accountability for their Reits, rather than being merely passive shareholders.

engyeow@sph.com.sg

More investors putting their money into Reits

Published on Aug 17, 2013

Compared with banks, S'pore Reits seen to give 'decent returns'

By Jonathan Kwok

THE local real estate investment trust (Reit) market has grown strongly in recent years, with 25 Reits now listed on the Singapore Exchange (SGX).

The newest addition is Soilbuild Business Space Reit, which made its debut yesterday. Two other recently listed ones which have also yet to pay out a distribution are SPH Reit and Mapletree Greater China Commercial Trust.

As for the other 22 vehicles, the average yield was 6.4 per cent, according to a note this week by SGX My Gateway, the bourse operator's investor education portal.

That is considered a decent return, market watchers said, with bank deposit rates still at ultra-low levels.

"The number of Reits listed on SGX has grown eightfold over the past 10 years, with Fortune Reit (becoming) the third Reit to reach a 10 year anniversary of listing on SGX," said the SGX My Gateway note. Fortune Reit, which trades in Hong Kong dollars, holds a portfolio of retail malls in Hong Kong.

The two older Reits are Singapore-focused shopping mall owner CapitaMall Trust, and Ascendas Reit, which owns business park and industrial space.

Reits, however, operate under a host of regulations and limitations. For instance, they face restrictions on the level of debt gearing they can undertake. And no more than 10 per cent of the properties in a Reit can be under development at any one time.

But it is such rules that have made them popular to investors who want peace of mind and a regular distribution income. This has helped to expand the Reit market dramatically.

For instance, the limit on the amount of assets that can be under development helps assure investors that they are buying into a portfolio comprising mostly completed properties. This would shield investors from the risks of having to depend on future returns from properties that are yet to be completed.

Also, Reits enjoy tax benefits if they pay out at least 90 per cent of income as distributions. They mostly keep to this payout ratio, assuring investors of a regular flow of income.

In contrast, while business trusts such as Forterra Trust, Perennial China Retail Trust and Croesus Retail Trust also hold properties, they are structured differently from Reits.

The rules governing business trusts are much less restrictive - in theory, a business trust can develop far more properties or distribute less than 90 per cent of income.

The SGX My Gateway data showed that Reit yields ranged from 4.4 per cent for Parkway Life Reit, to 8.5 per cent for Sabana Shari'ah Compliant Industrial Reit.

Yields tend to be lower for health-care Reits like Parkway Life Reit and shopping mall owners like CapitaMall Trust. This is because incomes for these assets are considered to be more stable and resilient, so the risk is lower.

On the other hand, yields tend to be slightly higher for office space Reits, and even higher for owners of industrial space like Sabana Reit, as these are perceived to be less resilient to downturns.

SGX My Gateway calculated the yields using "indicative dividend yields". This involved taking the most recent dividend, and annualising this amount to provide a yield for the whole year.
jonkwok@sph.com.sg

Yield-seekers take offshore hospitality route

The Business Times
Ng Zhuo Yang
13/8/2013

[SINGAPORE] As the Singapore real estate investment scene gets more challenging, potential investors here are eyeing offshore sale-and-leaseback properties in the hospitality sector.

In recent months, many yield-hungry investors have been turning towards these investments, which typically guarantee returns of around 6 per cent per annum for up to a decade or so.

According to Isabelle de Wavrechin, chief executive of French tourism management company Pierre & Vacances, the biggest benefit of investing in offshore sale-and-leaseback hospitality projects - mainly in Europe and Asia - is the comfort of hassle-free property management.

These investments also offer numerous sweeteners to further entice retail investors.

Buyers of Pierre & Vacances' latest project in the vicinity of Disneyland Paris - Villages Nature - receive a VAT refund of 19.6 per cent, which has been put in place by the French government to encourage investments in tourism residences.

Still, the sale-and-leaseback of hospitality properties to retail buyers is not new, said Joe Kwan, director of Asia-Pacific real estate research & strategy at UBS Global Asset Management.

"The restrictive domestic residential market, coupled with the weight of capital currently operating in the market, means that demand for offshore real estate opportunities has been on the upswing. This includes deals that have a sale-and-leaseback component."

In the past, these attracted a select group of retail investors who were typically seeking to diversify their portfolio and in some cases, to own a holiday home. But more recently, developers have been seeking to take advantage of an environment of high cash liquidity among retail investors, coupled with restrictions in the domestic property market, added Dr Kwan.

The result has been numerous opportunities in the largely fragmented marketplace for various forms of hospitality properties in Europe and Asia.

Singapore-listed Banyan Tree Group, for example, has retail projects in Lijiang, China; Lang Co, Vietnam; as well as Cabo Marques and Mayakoba in distant Mexico. Closer to home, there have also been opportunities in the sale-and-leaseback of hotel rooms in nearby tourism hotspots such as Malacca, Malaysia and Phuket, Thailand.

The Business Times understands that a launch by The Chedi Andermatt - a sale-and-leaseback property in Switzerland - has attracted at least five on-site visits since its release in late-June.

All these are emerging as popular alternatives to traditional buy-to-let retail investments in markets such as the United Kingdom, as investors do not need to worry about maintaining the property, yet receive a higher rental income each month.

Banyan Tree Residences assistant vice-president for property sales Roy Lau said: "Developing residences that are part of a professionally managed resort meets the needs of property investors."

But retail investors should consider the risks before hopping on to the hospitality sale-and-leaseback bandwagon, added Dr Kwan.

For one thing, they should expect pricing to be on the higher side because the flight to income will probably come with a pricing premium. Pointing out that institutional investors of sale-and-leaseback properties typically pay a premium, he suggested that retail investors should first compare the initial pricing of these properties on the market to avoid overpaying.

Moreover, complications could arise due to the longer sale-and-leaseback period in the hospitality segment, compared to residential or commercial underlying.

Besides considering asset management issues beyond the lease term, retail buyers should also be mindful that they are effectively buying into the strength of the operator, with little room for legal recourse in the event that problems occur later.

Likening the nature of some deals in the market to offshore investment funds that are focused on real estate development overseas, Rodyk & Davidson real estate practice partner Lee Liat Yeang told BT that he does not know of any laws in Singapore that protect local retail investors in such cases. "If there are disputes or if the developer gets into problems, the investor will have to take legal suits against the developer on foreign soils, and this can be costly and time consuming if it is even worth pursuing in the first place."

Other than operator risks, Dr Kwan noted that offshore investments also typically carry market, liquidity and currency risks. It is thus a "big mistake" to directly compare the yield in overseas markets with domestic yields.

He suggested that retail buyers should gain an understanding of the market that they are entering, and target a risk premium of 1-3 per cent for the additional risk of investing abroad.

Nevertheless, retail investors who are prepared to hold out over a long-term lease can typically take on risks of greater volatility. Hence, they should fully understand their own risk profile before committing to what offshore sale-and- leaseback hospitality properties have to offer.

S-REIT: Are We Blinded By Yield?

by Raymond Leung and Simon Ang 28/05/13 12:30 pm

In this low interest environment, investors have been actively seeking yield through investments in dividend paying stocks and REITs. However, the recent sell-off of Keppel REIT by Keppel Corp have sparked the question: Are we overpaying for S-REITs?

Sale Of K-Reit Stake
 In the past week, the sale of Keppel Reit (K-Reit) by Keppel Corporation to Goldman Sachs has sparked the discussion of the overvaluation of S-REITs. This, the result of buying behaviour exhibited by investors chasing yield. This is the second divestment of K-Reit by Keppel Corp this year following the sale of stake through a placement to unknown buyers arranged by Barclays Bank.

Goldman Sach purchased 180 million units at $1.555 apiece which is a 6.7 percent stake in Keppel-REIT from Keppel Corp. The placement price of $1.555 was a 3.1 percent discount to the market price of $1.605 on the day the announcement was made. Based on the placement price of $1.555 and the dividend of $0.0777 per share paid to investors for FY2012, the implied yield for Goldman Sachs on K-Reit will be 5 percent compared to 4.84 percent retail investors based on the price of $1.605.

Liquidity And Chasing Yield
 In the current low-interest environment with Singapore Government 10-year bonds yielding only 1.6 percent, investors in Singapore have been actively seeking yield from the market thus boosting liquidity. With such ample liquidity, Singapore has been attracting initial public offerings (IPOs) of various REITs and Business Trusts (BT) for IPOs.

This year alone, we saw the IPO of Mapletree Greater China Commercial Trust (REIT), Croesus Retail Trust (BT) and Asian Pay Television Trust (BT). Despite the large issues from these IPOs, more REIT IPOs are on the way.

Speculation is rife that companies such as SPH, OUE, Hoo Bee and Banyan Tree are looking to spin off assets to form the basis of REITs which will then list on the Singapore Exchange. A recent update from SPH mentioned that it expects to raise about $540 million from an asset spin-off (Paragon and the Clementi Mall) into a REIT. The IPO of this REIT is expected to be in early July.

Despite having new IPOs of REITs and BTs, there is still ample liquidity in the market which has led to the compression of yields of REITs. The compression was mainly attributed to the higher prices of REITs which have lead S-REITs to trade at an average of 1.24 times Price-to-Book based on reports by OCBC Investment Research.

K-REIT – Value Affirmation?
 Looking back at K-REIT, the fact that it is able to attract institutional investors like Goldman Sachs can be viewed as value affirmation and a positive outlook to S-REITs.

K-Reit currently owns the highest-quality office portfolio among office Singapore Office REITs including prime office buildings such as Ocean Financial Centre, One Raffles Quay and Marina Bay Financial Centre Towers 1 and 2 which makes up 80 percent of its portfolio by net leasable area.

With its prime portfolio, K-REIT attracted major investors such as Temasek Holdings and Capital Group which owns a 2.8 and 1.33 percent stake in Keppel-REIT respectively. This affirms the value of K-Reit and its prospect but at the same time proves the point that it seems to be be currently overvalued by investors.

Source: FactSet, table on K-REIT’s brokers’ recommendations

Investing in a Low Yield Environment
 When investing in REITs, it is important to consider the sponsor of the REITs, this particularly so after lessons learnt from the Lehman crisis. REITs with strong sponsors such as Mapletree Logistics Trust weathered through Lehman crisis despite the credit crunch. While REITs with weak sponsors such as MacarthurCook Industrial REIT(now known as AIMS AMP Capital Industrial Reit) almost went bust.

Source: FactSet. chart comparing the returns of AIMS AMP Capital Industrial REIT and Mapletree Logistics Trust (5 year horizon)

Bond ratings of a REIT is another factor to look at as it plays a huge role in the ability and cost for financing in REITs. Bond ratings and borrowing costs have an inverse relationship which means that the higher the credit rating of the company, the lower the cost of financing.

It is also favourable for REITs to obtain investment grade ratings as institutional investors like insurance companies have been constantly seeking for such bonds since the Lehman crisis as stricter risk mandates have kicked in. Having insurance companies as holders of the bonds are favourable as they tend to buy and hold to maturity which will bring stability to bond prices.

To sum up all the points, no matter how good the quality of the investment is, it will not be a good investment if you overpay.

Investors need to be prudent in picking the REITs not only in the quality of the assets but also the cost of investment. If Goldman Sachs is receiving 5 percent yield, why should retail investors settle for less?

Growth-led inflation a boon to Reits: Expert

Published on Apr 14, 2013

Fund manager: Their popularity reflects strong property market fundamentals

By Chia Yan Min

Real estate investment trusts (Reits) in Singapore and the region will keep doing well in an environment of growth-led inflation.

The recent popularity of Reits here reflects strong property market fundamentals, said Mr Patrick Sumner, head of property equities at Henderson Global Investors, in an interview with The Sunday Times.

He expects this positive picture to continue.

"Reits tend to do pretty well during periods of inflation, and will continue to do well in a growing economy where inflation is led by growth," he said.

Reits are funds that operate in a similar manner to unit trusts. But unlike unit trusts, which invest in shares, Reits specialise in income-generating real estate assets such as shopping malls, offices and industrial buildings.

They have become a sought-after investment in the current low-interest rate environment, with the additional lure of high dividend payouts.

While Singapore is "quite a volatile market" for Reits, Mr Sumner said the average dividend yield of 5.5 per cent "fairly reflects the underlying risk in real estate, and the prospective growth".

The veteran fund manager, whose team has US$2.3 billion (S$2.9 billion) in assets under management globally, added that Singapore Reits are still valuable relative to other asset classes.

"The spread of as much as 4.5 percentage points versus government bonds is an all-time high, and this gives investors quite a lot of comfort," he said.

He offered a bullish outlook for global property markets.

Low interest rates - a result of central bank policymaking - have fuelled the residential property boom in markets such as Singapore, Hong Kong and mainland China, he noted.

Property cooling measures introduced in these markets have had limited success given rising incomes and strong economic growth, he said.

"In China, there will continue to be very strong demand... most of the transactions are real ones, that is, first homes or trading up," said Mr Sumner.

He added that until the market cools, more property curbs are likely to be on the way for the Chinese market.

The United States market also appears to be staging a comeback, with strong rates of growth in apartment rentals, he said.

Retail sales have been boosted by a recovering housing market, and "the consumer environment remains healthy" for larger retailers.

"The US is in many respects our favourite market, and Reits are in good shape," he said.

Mr Sumner, who is based in London, was in Singapore last week for the launch of Henderson Global Investors' new property fund, targeted at retail investors.

The Henderson Global Property Income Fund, domiciled in Singapore, aims to deliver a return of 10 to 12 per cent a year, half of that from dividends and the other half from capital gains.

The fund will primarily comprise Reits, but will also include a range of listed property securities from around the world. Singapore Reits will make up about a quarter of the fund.

"We want to give Singaporean investors something they are familiar with," he said.

Henderson is working with AIA Singapore and GYC Financial Advisory as its anchor distributors.
"People want investment income that they can't get from cash and bond yields... if they want a diversified portfolio, Reits are, in our view, one of the most efficient ways of doing it."

chiaym@sph.com.sg

Hot Singapore REITs Still Seen Offering Attractive Yields

10 Apr 2013 15:17

WSJ BLOG: Hot Singapore REITs Still Seen Offering Attractive Yields

(This story has been posted on The Wall Street Journal Online's Market Beat blog at http://blogs.wsj.com/marketbeat.)
 
By Leslie Shaffer

If dividend stocks are sexy, Singapore's real-estate investment trusts just might be Ryan Gosling.

But while Singapore-listed REITs may seem expensive after a rally over the past year or so, they aren't when compared with equities and bonds, says Tim Gibson, head of Asian property equities at Henderson Global Investors, which manages US$106.7 billion. "They should sit somewhere between the two."

The FTSE ST REIT index tacked on 5.1% in the first quarter and was up 30.7% for the year ending March 31.

REITs are generally required to pay out much of the income from their underlying properties as dividends. Mr. Gibson says S-REITs offer the highest yields, both on an absolute basis and compared with the country's five-year government bonds. While Australian REITs' yields come close, the country's bond yields are higher than Singapore's, he says.

The yield on the FTSE ST REIT Index is around 5.17%, while the five-year Singapore bond yields around 0.5% and the STI's dividend yield is around 2.8%.

"As long as interest rates remain under control, S-REITs are in the sweet spot to continue their strong performance," Mr. Gibson says.

Henderson's new Global Property Income Fund will invest around 25% of its assets in Singapore-listed REITs, compared with 44% in the U.S., 9.5% in continental Europe and 5.0% in Japan.

S-REITs' income is growing despite Singapore's slowing economic growth, he says, partly because many are trading above their net asset values, meaning they can issue equity to finance acquisitions. Meanwhile, leases signed during the global financial crisis are now being renewed at higher rates and many S-REITs have begun buying assets outside the land-starved city-state, he says.

Mr. Gibson likes the office markets, citing the relatively low supply in Singapore and the length of time needed to create new supply. He tips Suntec REIT as one of the cheapest plays, offering a 5.5% dividend yield and an ongoing asset enhancement which should increase asset yield and cash flow. Henderson also holds CDL Hospitality Trusts.

Mr. Gibson says he is also positive on Singapore's industrial REITs, whose offerings are sophisticated and multi-story.

Singapore REITs To Vary Funds On Interest Rates: Southeast Asia

22/03/13 5:30 pm

Singapore’s property trusts, the second-best performers in Asia in the past year, may have to diversify funding sources as they aren’t prepared for an “interest rate shock,” according to Fitch Ratings.

The city’s real estate investment trusts or REITs have been increasing short-term debt with record-low interest rates, according to Johann Kenny, director of corporates at Fitch. They face refinancing risks when borrowing costs rise, and may be pushed to sell assets or shares to boost their funding, he said.

“Singapore REITs are not really well equipped to withstand an interest rate shock,” Kenny said in a phone interview from Sydney yesterday. “When a rating agency looks at a company, we look at the long-run average through the cycle of the interest rate environment and we don’t see the current low interest rates as a sustainable model from a macro-economic perspective.”

Singapore REITs, the biggest fundraisers in the city’s initial public offering market in the past year, had relied on short-term debt to reflect the length of commercial leases, Kenny said. Their funding costs in the past six years don’t reflect the challenges in a “normalized” interest rate scenario, he said.

The REITs raised $3.4 billion (US$2.7 billion), or 68 percent, of the $5 billion of stock sold in Singapore IPOs in the past 12 months, according to data compiled by Bloomberg. The biggest share sale was the $1.6 billion raised by Mapletree Greater China Commercial Trust, a REIT that owns assets including the Festival Walk shopping mall in Hong Kong and an office complex in Beijing. The trust, which was also Asia’s biggest share sale this year, surged 12 percent since its trading debut on 7 March.

Singapore Returns

Singapore REITs posted a one-year total return of 45 percent, trailing Japan’s 63 percent in Asia, according to data compiled by Bloomberg. The measure tracking REITs in Singapore climbed 29 percent in the past year, compared with the 9.3 percent increase in the Singapore benchmark Straits Times Index.

Debt held by Singapore property trusts make up 31 percent of total assets, higher than the ratios for Hong Kong, Taiwan and South Korea, according to data compiled by Bloomberg. Still, it’s lower than the 39 percent for debt held by Australian REITs, or 44 percent for Japanese trusts, the data showed.
 Moody’s Investors Service said it upgraded the ratings for unsecured debt issued by CapitaMall Trust, CapitaCommercial Trust and Ascendas Real Estate Investment Trust.

Refinancing Strength

The measure of secured debt relative to cash and the value of its investment properties’ for 12 Singapore REITs tracked by the rating company fell to 11 percent last year, from 21 percent in 2007, said Jacintha Poh, a Moody’s analyst in Singapore. That may decline to 9 percent by the end of this year, she said.

Another gauge tracking pretax earnings to interest costs also remained stable over the past six years, indicating the REITs are able to weather changes in borrowing costs, Poh said in an interview.
 “The REITs have a track record and what we want to focus on is their strength in refinancing,” Poh said, pointing to the S$5.89 billion of debt and equity raised during the 2008-2009 financial crisis.

Singapore’s REITs have extended the maturity of loans since the financial crisis, when almost 50 percent of their debt was due in 1 1/2 years, according to Vikrant Pandey, a Singapore-based analyst at UOB Kay Hian.

“REITs have diversified their sources of funding and extended debt maturities,” Pandey said. Still, “their basic model is perpetual refinancing of debt – there is no repayment of debt in the REIT model so you have that risk of refinancing.”

Conservative Bias

ARA Asset Management, which manages about $22 billion of assets through property trusts and funds, said it plans to avoid the missteps by some competitors during the financial crisis when they took on too much debt. The company, which has almost no leverage, is seeking to double its assets over the next five years through acquisitions.

“Our strategy is not an aggressive, highly-leveraged, exotic trading investing strategy,” Moses K. Song, chief investment officer at ARA Asset, said in an interview in Singapore on 11 March. “We don’t want our investors to be concerned that management is going around and trying to sort out its own balance sheet issues. If there’s a bias, it’s to be conservative.”

The company’s Fortune REIT is the best performer on the Singapore REIT index in the past year, rising 68 percent, followed by Frasers Commercial Trust. Ascendas India Trust was the only stock on the gauge to drop, falling 1.2 percent.

A total of 30 REITs and property trusts were listed in the city-state with a combined value of S$56 billion, making up 6 percent of the total market capitalization of stocks traded, Lawrence Wong, head of listings at the Singapore Exchange Ltd., said in a statement on 27 February.

“Currently, Singapore REITs have a stable operating environment which won’t change over a 12-month period,” Fitch’s Kenny said. “What we are flagging here is on the leverage and liquidity. Their dependence on bank debt means they don’t really have potential from an interest rate perspective to sustain a massive shock in interest rates.”

Reits with more offshore assets set to be listed here

Ong Chor Hao
18/3/2013

LISTINGS of real estate investment trusts (Reits) here are likely to comprise more offshore assets and be of a fairly large size, says the head of Asian real estate at Goldman Sachs (Singapore).

Both are signs and the result of a mature Reit market that is set to remain a dominant hub in Asia, said Michael Smith, a managing director at the bank.

In an interview with The Business Times, after Goldman helped to build the books for Mapletree Greater China Commercial Trust's (MGCCT) listing, Mr Smith said Singapore's strong regulatory framework sets it apart from many other countries.

Particularly, he pointed to the tax transparency enjoyed by Reits in Singapore, which differentiates between investing in the Reit and the developer.

In Hong Kong, where no such tax transparency exists, Reits have not gained the same traction as they have in Singapore, he added. And the trend for S-Reits to list foreign assets is set to be more norm than novelty. "As a consequence of running out of real estate, many of these Reits have to go offshore," Mr Smith said.

He was explaining why MGCCT was able to list a Hong Kong asset in Singapore - which may have seemed counterintuitive. There again, Singapore set itself apart with its pipeline of strong sponsors and the framework to support Reit listings.

"When you've got a sponsor . . . who's prepared to put that much capital to work, take real risk, compete in competitive processes to win assets with a tactical strategy to then list those assets in Singapore, that's a pretty unique thing that really advantages Singapore," Mr Smith said.

This is especially appealing to owners in countries without proper Reit frameworks, such as India, Indonesia or China, where properties may have been trading at below asset value. In contrast, MGCCT with its two foreign properties is trading at a 17 per cent premium.

"So because of the way that it's worked so well, I suspect others will look at this more closely and ask, 'look, can I do this as well? Am I going to get more value for my assets, are people going to value my assets better in the Singapore Reit framework than they currently do?' And with the Mapletree precedent, I think the answer is yes," Mr Smith said.

MGCCT's success also reflects strong interest in Reit listings in Singapore.

There are at least 10-20 parties "looking at doing something", although he believes that investors will be disciplined in what to invest in, given the mature and varied S-Reit market.

"It's famine or feast. Either it works really, really well because it's got the right assets, the right sponsor, the right structure, the right pricing. Or it works really, really bad."

While the Reit market has seen the addition of big names such as MGCCT, Ascendas Hospitality Trust and Far East Hospitality Trust over the past year, there were notable pullouts such as Dynasty Reit and M&L Hospitality Trusts.

Mr Smith sees big Reit listings as being here to stay; he expects a need to raise at least $500 million with assets worth $1-2 billion to draw investor support.

"I think the days when you can list a $100 million Reit IPO or $200 million are probably over."

MGCCT's subscription demand shows that investors have no lack of liquidity and want larger sizes and market capitalisation.

"Otherwise they will just keep staying in the big guys and not come to you."

A side effect of that is potential mergers on the horizon. As smaller players struggle to make accretive acquisitions with their higher yields, they may start trading worse as more big plays come to market and attract interest.

"And when you've got the big Reits trading at 10-20 per cent premiums and the small Reits trading at 20 per cent discounts, as it's happened in other markets, the big will take out the small."

While the Reit market now seems to be riding a high, Mr Smith also warned of potential dangers.

The first is the quality of real estate. The second is that currently low interest rates will eventually go up.

"At that point, Reit prices will fall as yields go up and there's nothing anyone can do about it because they're very interest rate-sensitive," he said.

The third is capital flows. Reits are currently popular with investors who want exposure to real estate but are staying defensive over risk concerns.

For example, if China or Singapore should decide to ease property controls, "there is a lot of momentum money sitting in Reits now which may go into buying China developers or Singapore developers".

For the S-Reit market to retain its leading status, Mr Smith's advice is simple: do more of what has worked to keep barriers to entry high enough so that other markets don't compete.

"And those barriers are really the best regulatory framework and the most sophisticated sponsors going out and buying the right assets, and listing the right Reits."