Category: General articles on REITS

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General articles on REITS Reits

Lessons I learnt of the impact of high interest rate on REITS

scrabble letters spelling fed on a green mat
Photo by Markus Winkler on Pexels.com
  1. Cost of funding

REITS has to distribute 90% of their income to the Unitholders. This means that it relies very much on debts for growth. Increase in interest rate will increase the cost of borrowing which eats into the income to be distributed.

2. Losing attractiveness as an alternative investment

In an high interest rate environment, there are safer alternative investments such as buying Treasury bills (Yield was at a 30-year high of 4.4% in December 2022) and placing deposits in bank. Hence, investors likely will turn to these investments that offers a lower risk.

3. Valuation of properties may drop

A high interest rate may lead to an increase in the capitalisation rate. According to the webpage dated 1st Feb 2024 from jpmorgan.com, the Fed’s interest rate hikes increased financing costs, limiting transaction volume and making it difficult to assess capitalisation rates. As a result, capitalisation rates have increased in the United States of America.

The formula to assess the value of property:

Value of property = Net property Income/ Capitalisation rate

When valuation of properties drop, the gearing ratio will increase which cause some of highly leveraged REITs to breach the gearing limit. Thus, financial institutions such as banks will be reluctant to extend loans to such REITS. This may force them to sell off assets at a loss or turn to investors to raise liquidity both of which are detrimental to investors.

Actions I wish I have taken along with Federal Reserve continually raising the interest rate

I wish I have sold some of the REITS at a higher price and perhaps buy it back when it corrected to an attractive pricing. These would have reduce the capital loss on my investments in REITS. However, timing the market is undeniably hard to execute.

Buy and hold has proven to be harmful to the portfolio. The upward trajectory for the interest rates undertaken by Fed has shown that the REITS took quite long to recover to their earlier pricing. A number of REITS has still not fully recovered to their prices in 2022.

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General articles on REITS

5 Reasons why you should invest in Real Estate Investment Trusts (REITS)

Buildings

What is a REIT

A Real Estate Investment Trust (REIT) is an investment vehicle that invests in a pool of real estate assets. These assets generate revenue by collecting rent from the tenants. Typically, 90% of the profit after deducting expenses and manager fees is then distributed to REIT unit holders on a quarterly or half yearly basis.

5 reasons to invest in REITS:

1. Offers you a better return

The average yield of the Singapore REITs and property trusts is 6.4% which is much more attractive compared to the 10 year government bond of 1.8%. Fixed deposit and interest rates are not indicated below but if you google for the current rates, it is around a meagre 1% or less.

 REITs also provide a good hedge against inflation with a yield spread of about 4.3% (Reits average yield at 6.3% minus MAS core inflation rate at 2.1%).

Source: SGX Research Chartbook (SREITS & Property Trust)

2. Easier to understand as compared to stocks

If the REIT own local assets, you could do a physical viewing of the properties. Take for example, if you invest in a retail REIT like Frasers Centrepoint Trust that owns local shopping malls such as Causeway Point and Northpoint City North Wing amongst many others, you can frequent the malls during the weekdays and weekends to observe the footfall. A crowded mall would mean the shop owners or tenants are doing well as shoppers are consuming their services or purchasing goods from them. The tenants will in turn be able to pay their property rental which flows into income for the REIT unit holder.

Image: By StockSnap from Pixabay

Besides physical viewing of the properties, you should look at the financial ratios of the REIT such as occupancy rate of the property and the rental reversion (A metric captured by some REITs to show whether new leases signed have higher or lower rental rates than before) that is normally found in their annual reports and quarterly presentation slides to help to gauge if the properties are sought after. Other critical financial factors like the gearing of the REIT, cost of debt and land lease of the assets should be found in their presentation slides as well. Studying these factors are even more paramount if the assets own by the REITs are situated overseas.

In comparison, there are more variables in assessing a stock. Potentially, there are a lot of competitors and more disruptions to the business model. Like how Google disrupt Singapore Press holdings, Tik Tok compete with Facebook and Grab with conventional taxi companies such as Comfortdelgro. 

3.  Tax-exemption

A REIT listed on the Singapore Exchange is exempted from tax by Inland Revenue of Singapore (IRAS) under the tax transparency treatment as as long as the REIT distribute at least 90% of their income each year. Unit holders will benefit as this will lead to a higher distribution income for them.

4. Professionally managed

Within a REIT structure, there are conventionally a REIT sponsor, Trustee, a REIT Manager and a property manager. The presence of the REIT manager is to set and execute the strategic direction of the REIT. It is responsible for the acquisition and divestment of the property. It usually appoints a property manager to rent out and maintain the property. Investors do not need to worry about the upkeep and daily maintenance of the property in contrast to owning a physical property like a condominium or commercial office.

A good REIT manager with a strong sponsor will also help to grow the REIT by making acquisitions that are Distribution per Unit (DPU) accretive. Investors will thus have an increased yield on the cost of their REIT investments.

5. Liquidity

You can buy and sell units of a REIT easily as they are traded on the Stock exchange. Whereas for a physical property, it can take months to find a willing buyer or a seller, not mentioning the substantial commissions, fees and taxes involved in the transaction.

Disclaimer: I own units of Frasers Centrepoint Trust.