Real estate, real returns

By Felicia Tan
/ The Edge Singapore |
Views of Singapore's skyline from CapitaSpring. Photo: Samuel Isaac Chua/The Edge Singapore
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Between real estate in Singapore and REITs, which is the better investment? We find out
Even before the spike in property prices during the Covid-19 pandemic from 2020 to 2021, Singaporeans had always had a love affair with real estate. Many a tycoon made their wealth building and owning properties, and even more contractors who build the buildings aspire to be developers themselves.
As for individuals, owning a private apartment or two is both an investment and a signal that they have attained something in life.
And little wonder, considering how property prices in Singapore are known to be among the highest in the world.
In 2021, Singapore ranked fifth in this regard, with property costing some US$1 million ($1.37 million) for 35.4 sq m (381 sq ft), according to the 2022 edition of the Knight Frank Wealth Report.
In land-scarce Singapore, owning property for investment purposes is largely seen as a status symbol, due to the benefits being a property owner affords. Such benefits include potential capital gains, as property prices in general rarely dip, as well as passive rental income. Those with the spare cash build a portfolio of stocks; those with deeper pockets build a portfolio of properties instead.
Property price trends
Since the introduction of the Property Price Index (PPI) in March 1975, Singapore has seen a steady increase in property prices, with the exception of the Asian Financial Crisis in 1998 when property prices fell 40% over a year and during the Global Financial Crisis in 2008 when prices fell some 25%.
In 2021, even as Singapore’s economy was trying to cope with the fallout from the pandemic, the private residential market surged to a 10-year high of 10.6% y-o-y price increase, from 2010’s 17.6% y-o-y increase.
The price gains were across the board, especially so for so-called Good Class Bungalows (GCB), which enjoyed a record year in terms of sales in 2021. GCBs are the top-tier landed properties with plot sizes of at least 15,000 sq ft. During the year, a total of 85 bungalows in GCB areas were sold at a total of $2.407 billion. This is almost double the transaction volume of 46 in 2020 and 120% higher than the deal value of $1.09 billion.
Near midnight on Dec 15, 2021, facing a persistently buoyant market, the government unleashed yet another round of cooling measures that took effect almost immediately on Dec 16. Among the changes include the higher additional buyer’s stamp duty (ABSD) of 17% for Singaporeans looking to purchase their second property, from the 12% previously.
The cooling measures helped rein in growth in the following quarter. According to flash estimates released by the Urban Redevelopment Authority (URA) on April 1, private home prices in 1Q2022 increased by just 0.4% y-o-y versus 5% in the preceding quarter.
Investing in real estate directly
For many buyers, owning a property is more for investment than for their own stay. When investing in actual property, several factors come to mind.
First, a large sum is required for the downpayment, depending on the total quantum.
Next, it is a lot harder to buy and sell property, which means your money may be locked up for years if there is no buyer willing to meet your asking price. Certain types of properties will also come with a certain waiting time. For instance, HDB flats come with a minimum occupation period of five years before their owners are allowed to sell the property. Similarly, for private condominiums and landed properties, a seller’s stamp duty goes up to 12% should owners sell their place within the first three years of purchase.
However, there are several upsides to owning physical property as well.
You are directly involved in the management and upkeep of the property, which means you will not be subject to the decisions made by others. It is also historically safer to purchase physical property as property prices tend to fluctuate less than for real estate investment trusts (REITs).
Investing in real estate through REITs
As an asset class, there are some similarities between investing in real estate and buying commodities. There are two ways to do so. You either buy the physical property or invest through a vehicle like REITs, property-linked stocks or exchange-traded funds (ETFs).
Investors looking to invest in the asset class without locking in a substantial amount or applying for a mortgage can consider REITs.
REITs are publicly traded entities that own and operate income-producing properties. When you buy into a REIT, you are essentially owning a portion of the properties held through that REIT. For instance, certain REITs own the shopping malls you frequent, while others own the office buildings you work in and even industrial buildings, warehouses and data centres.
If you’re investing in a REIT, you need to understand the assets within the portfolio. This is essentially the same as doing your research before sealing the deal on a house or building. Some common questions like where the properties are located, how much they are worth, how much they are valued at, and what is the tenure left on their lease, should be on your checklist.
Within the REIT sector, there are several sub-sectors for you to choose from. You will also have to understand how these sub-sectors work. For instance, if you’re looking at buying into a healthcare REIT, it is ideal that you should understand how the industry works. Is it a cyclical industry, or is it recession-proof? How will it be impacted by certain world events?
As with any investment, any advantage is a good thing. If you happen to understand a particular type of property like shopping centres, factories or offices better than the general population, you should put your money into a piece of property or REIT that owns properties with similar characteristics.
In short, buying a REIT is really akin to owning property at a lower price, depending on how much you’re looking to invest. However, the minimum sum will cost you less than the downpayment for a piece of property. If you’re looking to invest in the Singapore REIT (S-REIT) sector, prices per unit generally cost less than $3. A round lot, which is the minimum investment on Singapore Exchange, comprises 100 units.
In Singapore, REITs will also have to distribute at least 90% of their taxable income to shareholders as dividends. This means that like passive rental income, investing enough in a REIT is able to give you a steady income even at a time when share prices — or property prices — are down.
REITs are also impacted by macro- and microeconomic movements that affect the stock market. One recent example that comes to mind is the Covid-19 pandemic, where global borders were shut. At the time, units in hospitality REITs took a beating due to the impact the shutdowns had on their earnings.
More recently, the interest rate hikes imposed by the US Federal Reserve also saw a negative impact on REITs as their yields are being pressured by the rising rates, which will impact funding costs.
The ongoing war in Ukraine, which has led to a jump in oil and gas prices, will also impact REIT yields due to rising utility costs.
How do you spot a good piece of property?
When you’re buying a piece of property as an investment, you’ll want to know what your target market wants.
For instance, if you’re looking to buy a second residential unit catered to young working adults, you’ll want to take note of the following factors: location, the condition of the unit, facilities within the property, as well as close proximity to public transport and shopping malls.
When buying property to rent, the tenure of the property should not matter as much since tenant agreements generally last for a limited period of time. If you’re looking to net a tidy profit after, then you should be looking at freehold developments or developments with a tenure of 999 years.
Before signing on the dotted line, you should check the development’s past rental volume to see that the take-up rate is healthy and consistent.
What makes a good REIT?
REITs on the whole are perceived as attractive investment options due to their consistent distributions. Yet some may be superior to the rest.
When selecting REITs, you’ll want to consider a few factors such as consistent growth in gross revenue and net property income (NPI), as it is a measure of how much the REIT is receiving from its tenants. Consistent growth in the REIT’s distribution per unit (DPU), as well as DPU yield, are important as well since these metrics are what you as a shareholder of the REIT will receive.
In addition, a higher-than-average portfolio occupancy rate and weighted average lease expiry (WALE) are things to note. A high portfolio occupancy rate means the properties held by the REIT are filled or occupied, whereas a higher WALE indicates a stable tenant base.
A positive rental reversion for a REIT is also something to look out for since it translates to an increase in rental rates whenever a lease expires.
The gearing ratio, where a REIT’s debt is taken against its total assets, is also another metric to look out for. You’ll want a REIT with a lower gearing ratio, which means that a REIT will be able to undertake more debt to fund accretive acquisitions in future. In Singapore, REITs have a gearing ratio limit of 50%.
Finally, look at the REIT sponsor. There are benefits to having a strong REIT sponsor with deep pockets. A financially strong sponsor would be able to fund acquisitions should there be a need. It should also be able to include valuable properties into a REIT’s portfolio. Some of the S-REITs that are backed by strong sponsors include Ascendas REIT (A-REIT), CapitaLand Integrated Commercial Trust (CICT), Frasers Centrepoint Trust (FCT), Keppel DC REIT and Mapletree Industrial Trust (MINT).
Which asset class offers better returns?
In this article, we looked at information derived from transactions for the private residential property market for the past 10 years and compared it with S-REITs over the same period.
According to figures derived from URA’s PPI, investing $1 million in landed property in 2012 will net you an 18% return, giving you $1.18 million as at March 31.
Meanwhile, putting $1 million into a REIT like MINT will net you a 343% return or $4.43 million today. Conversely, if you had put the same amount into a REIT like Lippo REIT, your returns would have been declined by 69% to $310,000 today.
Looking at S-REITs on the whole, the FTSE ST All-Share REIT Index netted returns of slightly over 140% as at April 12, while the iEdge S-REIT Index saw returns of slightly under 110% as at April 12.
Types of real estate in Singapore
- Residential
  • HDB flats
  • Private condominiums
  • Landed property
- Commercial
  • Shophouses (conserved and nonconserved)
  • Shops
  • Offices
S-REIT sub-sectors
  • Office REITs: Suntec REIT, Keppel REIT and OUE Commercial Trust
  • Retail REITs: CapitaLand Integrated Commercial Trust, Mapletree Commercial Trust and Mapletree Industrial Trust (MINT)
  • Industrial REITs: MINT, Mapletree Logistics Trust and Ascendas REIT
  • Hospitality REITs: Ascott Residence Trust, CDL Hospitality Trusts and Far East Hospitality Trust
  • Data centre REITs: Keppel DC REIT and Digital Core REIT
  • Healthcare and others: First REIT, Parkway Life REIT
Key words
  • Aggregate leverage:
  • This is the ratio of a REIT’s total debt to its total assets. In Singapore, a REIT’s aggregate leverage cannot go over 50%.
  • Base fee:
  • The minimum fee REIT managers receive regardless of a REIT’s performance.
  • Debt-to-asset ratio:
  • This is calculated using a REIT’s total debt against its total assets.
  • Distribution per unit or DPU:
  • The income a REIT shareholder receives per every unit he or she holds.
  • Dividend or distribution yield:
  • A ratio where a REIT’s annual DPU is divided by its most current share price.
  • Net asset value (NAV):
  • A REIT’s NAV is similar to the valuation of a company. The NAV takes the estimated market value of all the REIT’s assets, without the value of its liabilities.
  • Portfolio occupancy:
  • The percentage of a property that is being occupied.
  • Price-to-book value (P/B):
  • This divides the REIT’s current share price by the value of the company’s assets. Traditionally, a P/B of less than one means that the REIT is trading at less than its fair value.
  • Rental reversions:
  • This is to see whether new leases signed by the REIT manager have higher or lower rental rates than the previous lease. Higher rental rates mean positive rental reversions, whereas lower rental rates have negative rental reversions
  • Weighted average lease expiry (WALE):
  • This is used to determine the risk of a particular property, where a higher WALE of around five years or more indicates that the REIT’s properties are usually tenanted with rare bouts of short- to medium-term vacancies. The reverse is true for a shorter WALE. A WALE is measured using the REIT tenants’ remaining lease in years and is weighted by the area each tenant occupies, or by a tenant’s rental income.
pros and cons
reits pros

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