I shall be talking about something that is considered safe and value would never fall in a country with a limited supply of land: Properties, more specifically; Real Estate Investment Trusts (REITs):
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves. - Investopedia
When you invest in a real estate investment trust (REIT), your money is pooled together with other investors' in a collective investment scheme that invests in a portfolio of income-generating real estate assets such as shopping malls, offices, hotels or serviced apartments. - Moneysense.gov.sg
As we can see from the definitions, the keywords are:
1. Owns real estate
2. Pool the capital of other investors - Similar to ETFs and mutual funds
3. Income-generating investments - The income is generated from the rents paid by the tenant of these real estates
So.. What is a REIT?
Essentially, the trust managers would take the money gathered from a pool of investors, to buy properties like malls, office buildings, hospitals, etc. The spaces are leased out to tenants (think of shops in a shopping mall - Uniqlo, h&m, texas chicken). The profits from the rent collected after paying off the loans and fees borrowed to buy the properties are then distributed to the unitholders (similar to stockholders receiving investments). This is called distribution yield.
Here are the sectors that a REIT may specialise in:
1. Retail: (Shopping malls):
This is the most common one in Singapore, however, it is also easily affected by economic conditions. In a downturn like 2020, there might not be visitors to a mall and the tenants may default on their rents. A strong REIT would be one with a lot of stable tenants (think big brands) that can afford to pay the rent during an economic downturn and good foot traffic.
2. Hospitality (Hotels, some residences)
This also easily affected by economic conditions, in a downturn like 2020, where there are basically no tourists, hospitality REITs are at a disadvantage as they no longer have any income. Hence, they will experience more volatility because of external market conditions.
3. Commercial (Office buildings)
Commercial REITs are relatively more stable as the lease agreements with the tenants are longer in duration. Also, if the tenants are majority larger and more stable corporations, even in an economic downturn, the inherent income of the REIT would not be affected.
4. Healthcare (Hospitals, nursing homes)
Healthcare REITs are expensive in Singapore. This is as Singapore is facing an aging population, we expect an increase in the demands for quality healthcare in the future. Singapore is also positioned as a location for quality healthcare for the region and investors know about it.
I would say that healthcare REITs are stable, provided they have the proper management and loan ratio.
5. Industrial (Data centers, warehouses, logistics buildings)
Industrial REITs are dependent on the type of industries that they cater to; some industrial REITs may focus on logistics buildings and when imports are not doing well, they would be negatively affected.
However, they are also more stable as the lease agreements are also typically longer.
Advantages of REITs:
1. Diversification (You would be investing in more than 1 property most of the time)
2. The steady stream of income through distribution yield (Passive income)
3. The gradual increase in property value (Especially relevant in land-scarce Singapore)
4. Liquidity (As Reits are sold on the stock market, transaction can occur immediately)
5. Low cash upfront (As compared to owning actual properties)
Disadvantages of REITs:
1. Exposure to only one sector (As a REIT usually focus on one sector, you would be exposed to the downside of the sector in certain economic conditions)
2. Management fees (As REITs are actively managed, fees are required to pay for their expertise)
3. Volatility (As a REIT is traded on the stock exchange, it is subjected to fluctuations of the stock market)
4. Subjected to changes in interest rates (Reits are allowed to borrow up to 45% of their total assets in Singapore, changes in interest rates might negatively affect the operations of these Reits)
How to consider a REIT:
1. Gearing ratio - The ratio of loans to asset, a low gearing ratio would allow the REIT to take advantage of lower property prices in an economic downturn.
2. Management team - A good management team would make the correct decisions, such as increasing the gearing ratio when property prices are cheap
3. Outlook on the sector/ industry and the properties - If you think that over the long run, the specific sector will not do well, you should probably avoid, likewise for the price of the property that the REIT is managing
4. Occupancy Rate - A higher occupancy rate would mean that there are more distribution yield
5. Tenants retention rate - A higher retention rate would mean more tenant are willing to continue their lease with the property
6. Fees - High fees would definitely dig into your returns. But if you're paying for the right team to deal with rationale tenants, unlike mutual funds, you would get return for your money
7. Distribution yield - A history of consistent distribution yield could be an indicator that it will continue to pay out the same distribution yield in the future.
Thoughts and comments:
For my personal portfolio: I have about half in REITs through my REITs ETF at the moment. If the price of the ETF is to keep falling, then I may consider increasing my weightage to take advantage of the low price. I love the idea of collecting passive income as a landlord. kekekeke.
Do your own due diligence when it comes to investing, I am not recommending you to buy anything.
With that,
Stay vested, Stay frugal my friends,
Dionysius
Sources:
https://www.investopedia.com/terms/r/reit.asp
https://www.drwealth.com/singapore-reits/
https://www.moneysense.gov.sg/articles/2018/10/understanding-real-estate-investment-trusts-reits
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