Understanding Long Term Investment: Real Estate and REITS ~TFIF 2017 Series

In this recap series of The Future Is Female conference 2017, we delve into one of the panels, Real Estate And REITs: Diversifying Long-Term Investment Portfolios

“Are REITs seen as an equity or a property investment?” Timothy Ho, Managing Director of Dollars & Sense, asked.

David Kuo, CEO of The Motley Fool Singapore, built on the question and established the four asset classes that can be invested in for the audience. He also shared his own take on what REITs is.

“The four asset classes in accordance with risk are cash, bonds, properties and shares. So you have to ask yourself which one of the four does the REITs visit? As far as I’m concerned it is a share, although some people say that it can be a bond because there is a yield, and some people say that it is a property investment.”

Quoting an article from the Business Times, Timothy shared that the Singapore’s REITs offer refuge in terms of market uncertainty. However, he pointed out that retail investors should also look out for volatility though REITs may offer a safe choice.

Roy Ling, Trainer at SGX Academy, decided to approach the question from an interest rate perspective.

“As you know, interest rates are going up because of the US market, and it definitely impacts REITS. When interest rates go up, asset prices drop. This is theoretical and immediate. When there is inflation, future cash flow goes up again and asset prices goes back up. So what does it say for Singapore REITS?  The article claims that assets in Singapore are volatile because of the increasing interest rates. However, due to a lack of better alternative investments, it is still a great buy.” -Roy Ling

Vivien Lim, Senior Manager of Investment Solutions at Phillip Capital Management expanded on Roy’s point by sharing that 2016 was a year of uncertainty. Yet, Singapore’s REITs had paid out a significant amount through the dividends. According to regulations, she observed that 20% of the income will go to the unitholder.

Over time, this secured dividend becomes a large portion of the total returns in a portfolio. Therefore in volatile times, this asset cluster will still give some form of certainty regardless the market condition.

Exploring Singapore’s Real Estate Market – 2017

Approaching REITs like a Landlord

David continued to refine Roy’s explanation on interest rates by using a landlord example.

“You need to think of yourself as a landlord,”David shared. “Your REITs is a portfolio of property in much the same way that you would be a landlord of properties, and you’ll have to borrow money to purchase the properties. So when interest rates go up, you have to pay more to service your loan.

If you have to pay more, it means that you’re going make less money from that property as whatever rent you make from that property, some of it will have to go towards paying the higher service charge of your loan. Therefore when interest rates go up, you will receive less rental income from your tenants who are also affected by the high interest rates.”

Real Estate Property As An Investment Opportunity

David elaborated on his example,”The reason why interest rates go up is that there is more economic activity going on in your country or in the world. If you have a property that is in demand and you know there is an increase in economic activity, people will want to rent it.

It only stands to make sense that you would want to increase your rent. So the impact of interest rates has two effects. You will have to pay more in terms of interest to service your loan, and you can theoretically charge more for renting out your property. When you look at interest rates, as long as you are aware of these two effects, you should be comfortable holding on to your investment.”

Choosing a REITs

When you are looking at a real estate, it is important to know the profiles of the tenants. “Look at the contract the tenants have signed and read the prospectus given by the company,” Veiverne Yuen, Managing Director of tryb Capital, suggested.

“If more than 85% of the tenants are going to be renewed in ten years, then that’s a safe investment. If many of the contracts are going to expire in one year, then it might require more research.” -Veiverne Yuen

Why Real Estate Investments Make More Sense Than Stocks Or Gold

The three questions we are encouraged to ask when looking into an investment are:

1. Who is the sponsor?
2. What is the asset quality?
3. What is the tenant quality?

Roy revealed that most people invest based on the yield and when there is a higher dividend, there is also a price to pay for it. If you are less of a risk taker, you should look for those properties with big sponsors, good asset and tenant qualities.

Types of REITs

Vivien agreed that there are many types of REITs listed on the SGX, and advised researching on the specific sector that you are interested in. She also echoed Roy’s point on the importance of a good sponsor. Phillips Capital, she shared, offers REITs ETF which is suitable for passive investment. The ETF is diversified and focuses on properties in Singapore, Australia and Hong Kong.

“There are only two types of REITS. A good REIT and a bad REIT. A good one is one that has, in the past, has been able to pay good dividends and the dividends increase over time and there is a visible potential for it to increase its payout to the unit holders. A bad REIT is one that promises you to pay you a certain dividend today but unfortunately, over the long term, it can’t.” -David Kuo

“While you can spend a lot of time analysing REITs and looking at the prospects online, you have to include visits to the properties. Spend time having coffee and take notice of the tenant and shoppers flow. Are the restaurants full, are people walking around with shopping bags?

This would signify that the tenants are doing all right and when the time comes for a lease review, there is a great chance of a REIT manager informing the tenant that the rent has gone up. More rent means more income, which translates to more distribution to investors. What you need to do is to have a look,” David advised. 

In the case of commercial REITs, David recommended the audience to take a look at the location of the buildings, the proximity to transport systems, and the availability of shops and restaurants. If the building has a decent layout, it is more likely to be popular in the commercial rental market. As such, the REITs of these building may be good options for investment. 

Edited by Joanne Ng