Real Estate Investment Trust (Reit) Singapore Dividend Yield
Many Singaporeans have dreamed about investing in Real Estate. This is the result of a widespread belief that real estate is the path to riches and wealth. While that belief is debatable, REITs does allow those who are learning how and where to invest their money as beginners a relatively affordable means to get invested in Real Estate. As an asset class, REITs are attractive given their association to household brands (i.e. Capitaland, Mapletree) and the high dividend yield.
Most Reits offer a dividend yield of 4-5% which is way higher than the current savings rate or the yield on the Singapore Savings Bond. As a result, it is worth our while as investors to understand what Reits are and how to assess them.
what are reits
A REIT is a company that owns income producing real estate. By owning a unit in a REIT, you own a piece of its real estate portfolio. This means you have a claim on the income that is being produced by the real estate that the REIT owns. Your claim to the income of the REIT materializes as distributions that the REIT pays. The REIT has to distribute, by law, 90% of its taxable income.
The REIT is a trust structure that was specially created to provide liquidity to property investment and lower the entry point for investors to invest In Real Estate. attached is a video from the National Association of Real Estate Investment Trust. Do note that the video relates to the US market and thus is slightly different from the Singapore Market.
Why are reits created
Reits were first created with the aim of giving ordinary US citizens the chance to participate in Real Estate Investment. Fast Forward to the present, Reits are a common investment vehicle in the financial industry, not just in the United States but also around the world. Reits have gained such immense popularity because they provide a win win for both investors and real estate participants. While it creates an investment opportunity for investors, it provides liquidity and an opportunity for value creation for real estate players.
Real Estate Companies can do more with less
Real Estate Players are able to create value from capitalising on a Reit Structure because they are essentially able to do more with less. What this means is that, real estate players are able to make real estate plays with 20% of the capital that they used to need. Previously, without the advent of REITs, a real estate player keen to invest in a commercial office tower like those owned by Capitaland Commercial Trust, may have to put in at least 50 million for a period of 5-10 years. With the use of REITS, they can now better utilise their capital by injecting a significant portion of a mature development into the REIT. In so doing, they they are now able to use only 20% of their own capital (i.e. 10 million) and 80% of public money from other investors in the REIT, all at the same time retaining management control over the property. Hence, if the net income yield is 5%, the return on equity for that particular investment can go up to 25%. Furthermore, the capital recycling also frees up 40 million for the parent to take part in other high yielding developments.
Apart from the hard numbers, real estate players are also able to diversify into other opportunities instead of just hunkering down on one particular deal. This increases their risk adjusted returns and is also another form of value creation.
The Reit Benefits Too
From the perspective of the REIT, this relationship where the parent company divest its mature property investments is also beneficial. This is what’s known as a REIT Sponsor. For Example, Capitaland is the Sponsor to Capitaland Commercial Trust and Capitaland Mall Trust just as Keppel is the Sponsor to Keppel Reit. Often, the reit has a Right of First Refusal when the sponsor wants to divest properties. However, reits are not likely to refuse as the sponsor will try to ensure that the deal is DPU Accretive for the unitholders of the Reit.
In the event that the acquisition is too large relative to the Reit, the sponsor can co participate in the purchase. This opens up opportunities for the Reit but at the same time allows the Reit to tailor the additional exposure that it is taking on.
A point that is commonly overlooked is that sharing a well known name with its sponsor often provides the impression of quality. This helps the REIT to have a better standing with banks, especially those which already have lending relationships with the parent.
How do REITs earn money
REITs is a fee based business structure, so they earn money by charging their clients a fee for helping to manage the latter’s properties. This can include all kind of properties, such as office, residential or industrial.
To increase the amount of fees earn, REITs acquire more properties through leverage. By borrowing from banks and debt investors, REITs are able to use the borrowed cash along with equity from its unit holder to buy good quality assets that produce stable cash flow. As the acquisition grows the total asset under management, it will also help the REIT earn more revenue.
Another way to increase the amount of fees earn is to increase the rental from existing properties owned by the REIT. When rents and cashflow increases, it also helps to increase the market value of the existing properties thereby leading to increase in asset under management. Reits can intentionally try to increase the rental yield by making the properties more attractive through Asset enhancement initiatives.
Why Invest in REITs
There are some investors who will consider between investing in a REIT vs investing in the Real Estate outright and renting it out. While owning the real estate has its merits, buying into a REIT has the following advantages
- Liquidity
- If you are to buy a property to rent, it will be difficult to liquidate the property. Selling a property will often mean that you need to engage an agent who will then try to market the property for sale. This process will often take about 3-6 months at the minimum. In comparison, selling your REIT investment can occur within a few minutes in a secondary exchange due to the depth of the equity markets.
- NO Operating Expenditure
- Landlords often have to pay for any damages to the furniture that are in their premise. Depending on the state of the unit at the end of the lease, you may have to pay significant amounts for any renovation or repair works. In comparison, because you do not own the physical asset, you do not have to worry about arranging or paying for all the rejuvenation works.
How to invest in a REIT
The Investor’s objective when investing in a REIT is somewhere between what that of buying a bond and buying stocks.
Bond: Ensure preservation of principal while collecting a coupon payment semi annually for the investment.
Equity: Achieve higher returns through capital appreciation as the stock price responds to potential catalyst. May come with the potential of capital loss.
The REIT investor wants the potential capital upside that equity owners have. However, they also do not want the potential capital loss that comes with being an outright equity owner. Hence, they are willing to settle for a lower rate of capital appreciation in return for the stability of a REIT. This stability comes in the form of frequent distribution of taxable income as well as business structure.
In essence, the investor should only invest in the REIT when they
- Expect the business to be resilient in the future
- Comfortable with the dividend yield that they receive, which is a function of the price they pay for the unit.
What is the dividend yield of a reit
To know what is the level of dividend yield that you want, it helps to first understand the constituents of dividend yield.
As seen in the picture attached, dividend yield is calculated by dividing the annual dividend received by the current price of the stock.
Where to find the dividend yield
It is easy to say that we should look for the dividend yield. However, if the company does not declare what the dividend yield is, how will you be able to calculate it yourself. We will be using Capitaland Commercial Trust (CCT) as an example in this walk through.
Firstly, go to Capital Commercial Trust‘s website and look for the historical prices. If the REIT that you are researching does not provide the historic share price on their page, you would have to look for it elsewhere either on Yahoo Finance or Shareinvestors. SGX can be a good option too.
After getting to the page, look for the share price. In this example the share price will be $2.07. Do note that the number to use for the 2018 calculation will be $1.75 which is the last price on the 31st of December 2018.
The next thing you do will be to look for the dividend table under the ‘Distribution’ Tab. In order to find the annual distribution in 2018, add up all the distributions for each corresponding quarter in 2018. This will amount to about 8.68 cents. When divided over a share price of $1.75, this will equate to about 4.96% in terms of dividend yield.
Is Dividend Yield a useful measure?
When we look at a REIT investment, dividend yield is useful when you are comparing returns across asset classes. For example, many REITs will compare the returns of their unit holders to that of say a CPF account holder or a 10Y Singapore Government Bond. Seen in that perspective, the dividend yield is a good measure of performance that investors can use.
However, dividend yield should not be the only measure that you use to evaluate your REIT’s performance across the entire investment. When you are looking for a REIT you buy, part of that checklist will definitely be a high dividend yield ratio. This is because you will want to purchase a REIT that is generating a high taxable income, and thus giving high dividends. You will also want to invest in the REIT when the price is relatively low. Hence, in the ideal scenario, you will want to invest in a REIT which, among other attractive qualities also has a high dividend yield.
After buying into a REIT, will you prefer to see the dividend yield go up or down? Well, at this point, it depends on your investment time horizon. If your investment horizon is relatively short, i.e. 6 months to a year, you will actually hope for dividend yield to go down. A relatively short investment time frame gives little time for Distribution Per Unit (DPU) accretion to play out. However, the price of the REIT can rise in response to positive catalyst and in doing so bring the dividend yield ratio down.
For example, in the case of Capitaland Commercial Trust, if you assume that distributions for 2019 will remain at 8.68 cents, a price of $2.07 will mean a dividend yield compression from 4.96% to 4.19%.
IF the investor is looking at a relatively longer term investment, he will also want the annual dividend to increase. This means that this widely touted ratio should not be your only measure if you are investing in a REIT for at least 2-3 years.
