5 reasons why you should invest in S-REITs

When I was eight years old, I remember seeing my grandma taking out her savings from a container tin she hid under her bed whenever she needed the money. Today, that image can only be seen on TV shows as most of us now keep our savings in a bank.

The bank pays an interest for every dollar we deposit but we know the rate is outrageously low in Singapore; less than a percentage per annum! You might consider depositing your money in foreign countries to earn a higher interest rate; Malaysia and Australia offer interest rates around 3%. However, you will need to think twice when you take currency exchange into account. From 1988 to 2015, the Malaysia ringgit and Australian dollar have depreciated by approximately 55% and 28% against the Singapore dollar respectively! That leaves us little choice but to keep our money with a local bank and you’re back to square one and pathetically low interest rates.

If you are still searching for a safe place to park your money and still earn a steady, higher return, then Singapore Real Estate Investment Trusts (S-REITs) may be just what you’re looking for.

[We’ve created a free resource for you to refer to about all the REITs in Singapore – Latest S-REIT Data]

But why S-REITs? Let me share with you 5 distinctive benefits:

#1 Singapore is Safe & Stable

We all know how expensive property can be in Singapore. In an island state with limited means to expand, property prices here will only continue to go higher and higher in the long run – and investing in REITs is a great way to invest in property.

But beyond the fact that Singapore is so land scarce, the only reason why property prices keep rising is because Singapore is particularly safe and stable place to live in. Because of this, business and investors dare to invest in the country driving economic growth, prosperity and rising property prices.

#2 Tax Free

Singapore REITs are able to offer exceptionally high yields due to incentives given by the government. REITs are exempted from the normal 17% corporate tax rate if it distributes 90% of its distributable income to investors as dividends. Because of this, REITs earn a higher income and can afford to pay out higher yields. And another piece of good news — the recent 2015 Singapore budget has approved and granted a tax-break extension for REITs for another five years!

#3 Well Diversified

If you own a physical property, your risk is concentrated in one area. If the property you own is somehow inexplicably swallowed up by the ground, your entire asset is gone (exaggerated example I know, but you get the point).

On the other hand, a REIT owns various types of real estate assets ranging from malls, offices, industrial parks, hotels, and hospitals that are located in multiple locations and countries. Therefore, your risk is well-diversified.

For instance, if you like the idea of owning a shopping mall in Singapore, then you can consider Frasers Centrepoint Trust that owns malls like Centrepoint, Causeway Point, Changi City Point and more which are all diversified island wide.

Since its listing in 2007, Frasers Centrepoint Trust has netted cumulative dividends of around 68% — and that’s excluding capital gains! If you invested $10,000 during its IPO, you’d have already collected $6,800 in dividends alone while still being entitled to more future streams of dividends. In another four years, you can expect your initial investment to break even, which means your unrealized capital gain and future dividends is all pure profit!

FCT yield

Estimated annual dividend yield of Frasers Centrepoint Trust based on 2007 cost

#4 Regulated

The Monetary Authority of Singapore (MAS) under the Collective Investment Scheme Regime of Securities and Future Act governs Singapore REITs. MAS regulations state that a REIT’s total borrowings cannot exceed 35% of its total assets and they can only borrow up to 60% only with a credit rating from one of the three largest rating agencies (this regulation will change to a flat 45% from Jan 2016 onwards).

On top of that, REITs are not allowed to spend more than 10% of its total asset value on new developments (this regulation will change to a 25% from Jan 2016 onwards). So the risk of a REIT defaulting on its debt is low and managed from a regulatory level.

At the same time, it is not wise to assume that all REITs in Singapore are safe to invest in. Despite being well-regulated, there are cases where a REIT manager can mismanage a REIT and lead it into financial trouble.

#5 High Yield

Singapore REITs averaged a 6% yield in 2014. Some REITs even have yields as high as 8% (this doesn’t mean you should pick a REIT just because it has a very high yield. You need a proper investment process to select the best REITs in Singapore). For such a safe and stable investment that pays dividends four times a year, the yield from REITs are far higher compared to other stable investments like bonds and fixed deposits. Furthermore, REITs also give you the potential for capital growth increasing your overall gains even more.

If you’re an income investor interested in adding REITs to your portfolio, remember to check out our S-REIT data section for information on distribution yield of all Singapore REITs and more.

Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Rusmin is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur and is the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple’s iBooks. Rusmin was actually a former SIAEC scholar who gave up his scholarship and a cushy career to follow his itch of learning how to be a better investor and ultimately lead a life of financial independence. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.

9 Comments

  1. patrick

    July 23, 2015 at 11:09 pm

    Your opinion is a stark contrast to the views put up by 2 OCBC analyst that was published in The Straits Times a couple of days ago. Your this opinion appeared to shallow n presumptuous without indepth considerations.

    • The Fifth Person

      July 24, 2015 at 12:38 am

      Hi Patrick,

      Analysts have their opinions and rightly so do we 🙂 Even among analysts, you get different opinions and calls on any particular stock.

      The only thing that matters is which opinion makes the most sense and logical to you. In the case of REITs, we love the instrument (as do many other income investors) and actually invest our money in it. But you don’t have to agree with us.

      If the article was perceived as presumptuous and shallow maybe because of its relative brevity, we welcome you to go through all 15 video lessons in our Dividend Machines course section on REITs.

      You get to hear our “in-depth considerations” then and if you aren’t convinced, feel free to ask for 100% of your money back. No questions asked. Not too bad a deal if you ask us! 😉

      Regards,
      The Fifth Person

    • Rusmin Ang

      July 28, 2015 at 4:37 pm

      Hi Patrick,

      Thanks for dropping by!

      Yes, this isn’t the first time my opinion has differed from those held by analysts and it has turned out reasonably fine for me honestly. Regardless of which opinion you subscribe to, what’s important is to understand the logic and rationale behind it and not follow any opinion blindly (mine included).

      One obvious reason for the differing opinions on REITs lies in the time horizon; I have a long-term view whereas the analyst has a shorter-term view (till 2016). In a nutshell, I still like Singapore REITs in the long run for reasons mentioned in my article above.

      To give you an analogy, it’s similar to telling someone “staying in Singapore is safe” because it’s politically stable. On the other hand, there is still crime lurking around and one should not be fully complacent. Likewise, it’s true that REITs in Singapore are attractive but there are still risks involved like any investment. One needs to adopt a systematic and sound approach to select a good REIT to invest in.

      There is one thing though that the analysts on the news and I have in common: we advocate investors to practice stringent bottom-up stock investing which is the core strategy I’ve used since day one of my investing journey 🙂

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