Why Should You Invest in a Reit
In learning about where to invest money in Singapore , it helps to understand the history of a particular financial vehicle, why it was created and how it can be relevant to your respective needs.
The history of a REIT is briefly covered in Real Estate Investment Trust (Reit) Singapore Dividend Yield, where we talk about what a REIT is and shared a video from NAREIT about the origins and use of REITS.
A Reit provides access to a stable portfolio of income producing assets
Access to a stable portfolio of income producing assets is the most important aspect that makes REITs a good investment when compared to other assets. This is because for properties to qualify for inclusion in a REIT portfolio, it often has to have a stable occupancy rate, credit worthy tenants and also stable cash flows. This makes it superior to other assets, which can produce negative cashflow today but have sky high prices because overly optimistic expectations has been baked into the valuation of the asset.
A Reit provides certainty in distributions unlike stocks
By now, you will know about distribution yield and the legal obligation of Reits to pay out 90% of their distributable net income to unit holders. However, it is good to appreciate the uniqueness of this obligation as no other equity holder have similar benefits. While it is true that there are some stocks also have high dividends, the amount of dividend is a manner of management discretion. Even if the company does spectacularly well, it may opt to retain the same level of dividends instead of paying it out to shareholders. Companies may also do share buybacks, which benefits shareholders indirectly through a smaller float and higher share price. However. for equities, the ball is in management’s court.
A Reit provides more upside than bonds
More often than not, Reits have more upside than bond holdings. This is because a coupon of a bond is fixed at the point of issuance whereas distributions can increase as long as the distributable income from the REIT increases.
Of course there are exceptions to this rule. One example is where the global economic slowdown leads to the inversion of the yield curve. In such situations the capital appreciation along with the coupon payment from the 10 year government bond is more likely than not to triumph the total return from hold a REIT.
A Reit is less volatile than stocks
Due to the somewhat predictability of a Reit as well as the typical property portfolio of a Reit, they are much less volatile than stocks. Stock prices are in general a reflection of market’s expectation of future earnings. As the market can bounce from overly triumphant and optimistic to being overly cautious and fearful, there can be much volatility in its expectations. This is inadvertently reflected in large price movements. A Reit on the other hand, distributes most of its income quarterly. As such, investors actually do see actual cheques coming in through the mail. To sell the security will be to end the quarterly inflow of distribution money. Even if the market were to be irrationally fearful of a distribution drop, a Reit can demonstrate its earning resiliency through accretive distributions. The attractiveness of higher distributions as well as a higher distribution yield due to lower prices, as a result of market sell off, will attract the marginal buyer. The cumulative effect of this results in the prices of Reits being much less volatile than other stocks in general.
A Reit is more accessible
The typical entry point for a unit of a Reit in Singapore is about SGD 1000 -3000. This is roughly within the reach of most Singaporeans after a few months of savings. However the entry point of a bond (with the exception of the Singapore Savings Bond) is SGD 250k. By having a lower entry point, it allows investors with a lower capital base to also participate in the returns of a REIT and the underlying properties.
Drivers of reit performance
- Investment in a Logistics Reit, allows you to participate in regional economic growth which correlates with the transfer of goods in the region. Given that the transfer of goods increase as gross domestic production increases, there should be greater demand for logistic solutions along the main road/rail lines in the region.
- The demand for logistic solutions in a region with strong economic growth and thus high volumes of good transfer can have a multiplier effect. This is because downstream suppliers may want to be closer to their upstream counterparts. When that happens, the owners of logistic warehouses tend to see stronger demand for warehouse space.
- Favourable Governmental and Tax Regulations can be a factor that drives the performance of a Logistic Reit. Governments can put in place laws that incentivise companies to concentrate most of their supply chain in the country. To receive strong tax breaks or reduce penalties, companies may reconfigure how they store both intermediate and finished goods, which can affect the demand for logistic space in teh region.