Reits: An attractive alternative form of property investment

Reits: An attractive alternative form of property investment

In just 14 years, the real estate investment trust (Reit) industry in Singapore has drastically transformed the country's investment property landscape, making it one of the most admired in the Asia Pacific.

The Singapore Reit industry now ranks third in size in the region, behind Japan and Australia. S-Reits have been actively contributing to the improvement of properties in Singapore, practically in all sectors of the rental market: retail, office, and industrial.

As landlords, Reits are committed to maintaining and improving their properties and have consistently demonstrated this commitment by investing in extensive asset enhancement initiatives to refurbish and upgrade older properties in their portfolios, including introducing eco- technology into their properties.

Such improvements have led to improved offerings for tenants and raised the quality of real estate in Singapore as a whole.

The motive for Reits to continually upgrade their investment assets is driven by commercial interest doubtlessly, to generate return on investment for unitholders.

But the resultant benefit is not confined to Reits, or else the progress could not be sustained.

The other three key players in the game are tenants, consumers, and the Singapore economy at large.

Unfortunately, this aspect of the impact of Reits has tended to be overlooked; instead, fingers have been pointed at Reits as the culprit causing the plight of tenants, especially the smaller enterprises, who bow out of the business citing rising high rent as a key reason.

This has in fact caused the resurgence of the classic landlord/ peasant conflict.

There will continue to be murmurings, especially from the quarter that has been ousted from their comfortable rented nests of many years until rentals made it untenable for them to continue with their business.

Their lamentation is that Reits which appear to have taken over "most" of the rental properties in the country, have been regularly raising rental rates to maximise their yields and keep up with their distribution per unit (DPU) growth.

Look at the big picture

To be objective, one needs to look at the big picture.

Many rental buildings here (both office and retail) have remained in the same state for 20-30 years and maybe even longer.

Fortunately, many of the tired-looking buildings have also been rejuvenated and given a new lease of life after they were acquired by Reits.

Someone once told me Singapore needs Reits to transform the investment property market the way the Urban Redevelopment Authority (URA) did the Singapore landscape over the last few decades; the difference is that Reits will have to do it on a fully commercial basis.

The benefits of developing the Reit industry to the economy is perhaps more obvious in that it enables developers to recycle their capital for other investments, creates specialist professional jobs, generates high-value supporting services, etc.

The best evidence of this are the aggressive measures many of our neighbours are taking to develop their own Reit industry.

S-Reits are here to stay. S-Reits are celebrating their 14th anniversary since the first Reit, CMT, was listed in Singapore in 2002. Today, Singapore has succeeded in having 38 Reits listed on our stock exchange, with a total market capitalisation of S$74 billion.

What is interesting is that, according to estimates, about 25 per cent of the shares of Reits are in the hands of retail investors. (The sponsor groups and controlling shareholders are estimated to hold some 35 per cent, while institutional investors own 40 per cent.)

Assuming most of these retail investors are Singaporeans, the 25 per cent translates to a whopping S$18 billion in investment money.

The government has put in measures to regularly improve the operating and regulatory environment for Reits, so that they can continue to grow, and at the same time operate under good corporate governance, and embrace best industry practices.

We are fortunate that the listed Reits here are under the prudent supervision of the regulatory authorities, which should instil confidence among investors, both here and overseas.

A stable and transparent tax infrastructure to support S-Reits helps to advance the goal of establishing Singapore as a fund management and asset management hub, and continue to fuel demand for expertise in these high-value financial areas.

Specifically, it will allow S-Reits to maintain their competitive advantage over other regional markets and allow the Republic to position itself as the pre-eminent global hub for the listing of S-Reits.

It will also allow Singapore to attract foreign capital and investment in S-Reits.

Many Singaporeans are eager to find investment alternatives that give higher returns than banks' fixed deposits or their CPF ordinary accounts. Reits are perhaps one such alternative.

Some investors may have discovered that it is possible to turn Reits into personal ATMs that they can "withdraw" money from regularly.

This is what Reits are in a nutshell: giving the investors a stable income on a regular basis (every three or six months), with potential upside that their price will go up over time.

The ability to enter and exit Reits easily is another big contrast to direct investment in physical assets. Another benefit is the affordability of Reits, with outlay as low as a few hundred dollars.

Perhaps the next exciting phase in Reit development here is brewing.

This is the rising use of CPF and Supplementary Retirement Scheme (SRS) money for Reit investments - something that may significantly affect the growth of the Reits industry over the next few years.

Looking at CPF statistics, as at March 31, 2016, Singaporeans had about S$308 billion in their CPF.

This is after deducting the S$190 billion drawn down for housing purchases.

Of the S$308 billion, S$113 billion is in the Ordinary Account, S$78 billion in the Special Account, and the rest is in Medisave and Retirement accounts.

If we focus just on the Ordinary Account which CPF rules currently allow to be used for investments after setting aside S$20,000, the investible amount is estimated to be about S$73 billion. Since the rules allow up to 35 per cent of the investible money for share investment, this means a potential pool of S$25 billion available for investing in shares, including Reits.

This is an enormous sum of money which is looking for higher returns than the 2.5 per cent that CPF gives.

Over time, as people become more aware of the relative attractiveness of Reits, more of such CPF monies will flow into Reits.

And that will be interesting because it will mean that more Singaporeans will be owners of investment properties both here and overseas.

Even investing abroad

Singaporeans, like most Asians, traditionally prefer to invest in brick-and-mortar assets.

Some even venture to buy overseas properties.

Reits present a new form of investment tool to meet such aspirations of Singaporeans to own investment properties with regular rental income, without having to deal with all the problems associated with investing directly in a property, especially in unfamiliar overseas markets.

It is interesting that, currently, CPF rules do not allow Singaporeans to use their CPF money to buy overseas properties directly.

But with Reits, one can effectively do that.

For example, one can invest in German office buildings by buying IReit Global shares.

One can own a stake in shopping malls or hospitals in Indonesia through Lippo Mall Trust and First Reit respectively.

For exposure to China and Hong Kong properties, there are Mapletree Greater China Commercial Trust, EC World Reit, CapitaLand Retail China Trust and BHG Retail Trust to choose from.

One can also access the US, India and Japan markets through Reits listed here.

Today, some 30 per cent of the Reits' assets are outside Singapore.

Effectively, this means that the Reits are bringing properties from all over the world to the doorstep of Singaporeans for them to pick and invest in, with the added comfort that these overseas assets are owned and managed by Reits which are under the regulatory oversight of our government authorities.

We may therefore see a stronger trend of Singaporeans sinking more of their excess investment money (including CPF and SRS money) into Reits, instead of pursuing the traditional approach of buying a physical property asset for investment.

Best of all, one gets to keep 100 per cent of the dividends received from Reits without having to worry about the taxman's share.

This article was first published on October 10, 2016.
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