REIT Capital Recycling

REIT Capital Recycling Rationale

Imagine you are a turtle. After much searching, you found a good dry tree trunk for you to bask in the sun. When you are enjoying the heat (given that turtles are cold blooded), another turtle approaches and wishes to use your tree trunk. Will you agree and will you share?  Why should the turtle share?

This analogy may seem far off. However, it is one of the key question that can plague an investor’s mind. In learning how and where to invest money in Singapore as a beginner, that is really one of the most important question you should always ask. If the returns are so good, why will anyone want to share a piece of the action with me. Intuitively, we understand the concept of Real Estate Investment Trust Dividend Yield. Every investor is entitled to his or her return for the opportunity cost of investing in the REIT. However, if you think one layer deeper, the REIT is often managed by someone more knowledgeable than you. So if the income producing real estate can really produce 5% in dividend yield, why not keep it for himself. Why will the manager go through all the hard work to source and operate a property only to let you the investor get rewarded for not doing much? Take Mapletree Logistic Trust for example. As of this writing, It is 31 % owned by Mapletree Investment Trust, with over 60% of free float. Yet the dividend yield of 5.1% is attractive considering that Singapore Government Bonds are trading at below 2%. If it is so attractive, why shouldn’t Mapletree Investment Delist the REIT and just enjoy all the benefits itself?

The reason Property Owners do that is because of Capital Recycling

Capital Recycling: 

As the Property Owner/Developer takes the risk to source for a new piece of land and develop the property, they often get the highest return when the property is fully function and have many creditworthy tenants. The reason for this is that, they have taken a piece of land which was previously not yielding any rental, and given it a new purpose as a purpose built development that is now receiving cash flow in the form of rents. As such, the value of the property is now adjusted to reflect the higher cash flow potential of the asset.

However, what happens after the property stabilises? From a developer’s point of view, keeping themselves fully vested in the property will not provide as good a return as if they repeat the developmental process on some other empty plot of land. It is this profit motive, that makes developers wish to share the returns with investors. By getting investors to provide them with the liquidity to either partially or completely divest their holdings in the stabilised property, they get to recycle the original capital to obtain higher returns.

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