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By Poh Yung Shun, Sean 29 August 2005 Introduction Since the first REIT (Real Estate Investment Trust), CapitaMall Trust by CapitaLand, was launched in Singapore on July 17th 2002, the Singapore REIT market has since developed rapidly to become the most established in Asia. Total market capitalization now exceeds S$15 billion and expects to grow further by another S$1.8 billion with more listed REITs entering the market in the within the next twelve months. REITs are investment vehicles instituted for the purpose of creating income. REITs invest in, develop, and manage income-inducing real estate like offices, hotels, apartments or malls, often also dealing with the financing of real estate. All Singapore REITs are listed and are bought and sold like other securities listed on SGX at market driven prices. The revenue generated from rental payments under the properties is distributed to unit holders either annually or semi-annually. REIT companies are hence effectively what have become known as ‘pass-through entities’, passing on profits to investors. Types of REITs In the global REITs market, there are generally three types of REITs. They are Equity REITs, Mortgage REITs, and Hybrid REITs. Equity REITs invest in and own properties and most of their income is derived from the rent of their properties. Mortgage REITs are mortgage backed securities. They also loan money to real estate owners thereby receiving income from interests earned on the mortgage loans. Hybrid REITs is a combination of both the investment strategies of the above two REITs. Currently, Singapore REITs are all Equity REITs. Benefits of REITs Judging by the oversubscriptions of the REIT IPOs in Singapore, it can be seen that REITs have been well-accepted and attractive among the investors ever since the launch of the first REIT to the most recent sixth REIT (MapleTree Logistics Trust) listed on July 28th 2005. The benefits of REITs that have attracted so many investors are listed below. • • • REITs offer investors exposure to professionally managed real estate with a small capital outlay. Relatively low volatility in unit price. Highly liquid as compared to owning actual real estate property itself as they are publicly traded therefore investors also have the potential for capital gains when the share price of a REIT rises.
while corporate earnings vary monthly. -2- • . analysts. Tenants may find difficulty paying rent during economic downturns resulting in the rate of rental falling significantly due to decreased demand. it is difficult to see why investors would not be attracted in investing in REITs and reap the benefits. During bouts of economic slowdown. Earnings from buildings are generated from long-term leases providing stable returns. the property markets would also be adversely affected. auditors and the media. Most categories of investors enjoy tax exemption on distributed income (the individuals) or exemption from tax at source (Singapore incorporated and taxresident companies). REITs will be hit by falling rental income and a resulting drop in property value. Below are the key risks relating to REITs. Investors are allowed to use CPF funds to invest in REITs. • • • • • With a list of advantages as listed above. who are subject to a reduced 10% withholding tax. with the exception of foreign non-individuals. In a depressed property market. The recent hype over the REITs market has created a great awareness over this attractive financial instrument. REITs nonetheless entail certain risks. This scrutiny provides an investor a measure of protection. However.• REITs are required to distribute at least 90% of net income to unit holders thus gives it an advantage over company stocks as companies may choose not to distribute dividends. Hence the income generated from such decreases and the dividend payouts to investors are reduced accordingly. Many investors out there may think that this is a great investment even to the extent that this is a sure-win investment. Performance of REITs is monitored on a regular basis by independent directors. they must beware of the risks as well. There is a low correlation between REITs and conventional asset classes thus providing diversification away from stocks and bonds within an investment portfolio. • The most fundamental risk is that investors may lose money when they need to sell their REIT units in times of declining unit prices. This contrary behavior is caused by the simple fact that real estate earnings don't behave like corporate earnings. just like with other equity securities. based on sales. despite these advantages. REITs have provided higher returns as compared to bank deposit rates and even some equity. Inherent Risks of REITs Investors should not take REITs for granted perceiving it as a safe investment like bonds but rather.
Currently Listed REITs in Singapore At present. However this risk is inherent is most financial instruments. Bad or constantly changing management may lead to poor asset acquisition.20 150% 42 Properties Fortune REIT CapitaCommercial Trust Suntec REIT HK$4. they would have to issue new units to finance their purchases.42 5 Properties Ascendas REITs $0. A high concentration of development in one community or geographic region may leave it vulnerable to a downturn in that area’s economy.00 HK$6.68 $0. These virtues are necessary for making the best of the inherent value of properties the REIT is in charge of. people would pull their money out of REITs and go for other investments offering better interest rates. the strength of a REIT is largely dependent on the integrity and the shrewdness of its managers.75 $1.96 $2.97 43% 15 Properties -3- . This is a risk highlighted by Temasek Holding CEO.17 17% 2 Properties MapleTree Logistic Trust $0. The dilution effect from deferring of issue of new units to the future when buying new properties. When REITs purchase new properties. there are 6 REITs listed on the Singapore Stock Exchange (SGX). Table 1 Name of REIT Date Listed 17 Jul 2002 19 Nov 2002 12 Aug 2003 11 May 2004 9 Dec 2004 28 Jul 2005 Nature of REIT Listed Price Price as at 26 Aug 2005 Percentage Increase in Price Since Listing 152% Portfolio Size CapitaMall Trust Retail Business Space and Light Industrial Assets in Hong Kong Commercial Retail and Office Space Logistic $0. • • Investors should therefore assess and balance the benefits and risks of REITs before diving into the REITs market. As such.48 33% 48% 5 Properties 8 Properties $1. it would mean that there will be a dilutive effect of lower yield per unit. bad management is a very great risk for a REIT.88 $2.00 $1. A summary as of 26th August 2005 of the 6 REITs is presented in the table below. Essentially. With more units.30 $1. • Investors should examine where the properties of the REITs are located.• If interest rates were to increase unexpectedly and higher than the yields offered by REITs. Ms Ho Ching.
the REIT would acquire properties and distribute the income derived from rental back to the unit holders in proportion to their investment amount. have the properties been able to retain the tenants and continue to earn rental income? The competency of the managers should not be overlooked as well. what the REIT structure is like in Singapore as well as understand how it functions. With the capital generated from investors. maximizing every rental space possible? These are some of the important issues that an investor should look at in determining the quality of the REIT prior to investing in one. During an economic downturn in the past. investors who are normally termed as unit holders would invest their monies into the REIT. Do the newly acquired properties really have the potential to grow? Are the properties managed effectively. UNIT HOLDERS Distributions Investment in REIT Trustee’s Fees ASSET MANAGER Management Services Management fees Property Management Services REIT Income from property TRUSTEE Represents the interest of the unit holders Ownership PROPERTY MANAGER Property Management Fees PROPERTY ASSETS With the knowledge of how REITs functions. and rental price. The trustee represents the interest of the unit holders in ensuring that their investments are managed effectively. rental space. The Asset Manager of the REIT is the one who decides what kind of properties should be acquired and be included in the portfolio.Understanding the REIT Structure Before investing in any REIT. The property manager is the one who manages all the properties that are under the ownership of the REIT such as determining the number of leases. In the figure given below. it is thus important to know what kind of properties that the REIT owns. the kind of tenants. -4- . One should consider whether there are high rates of building occupancy which can bring stable income and distributions to the investors. it is essential to know first of all.
the number of investors in the REITs market has increased significantly.68 Actual Paid (cents) 9.46* HK31. and reducing costs such as operating costs and management fees contribute to the growth in DPU.39 5.13 7.76 1.30 1. improving income through higher rentals.32 Price as at 31st Dec 2004 1.00 6. investors would be able to determine if the REITs has performed well.85 Comparing both tables above. This has led to a surge in REITs share prices as reflected in Table 1 above. As a result of the attractive returns. DPU Performance for FY2004 Name of REIT CapitaMall Trust Ascendas REITs Fortune REIT CapitaCommercial Trust Original Annualized Forecast in Prospectus (cents) 8. As a result of price appreciation. *** Suntec and MapleTree REITs are excluded because they were listed on 9th December 2004 and 28th July 2005 respectively.39 5.1 Dividend Yield (%) 2.Gauging the Performance of REITs REITs investors are all concerned with its performance.27 DPU Yield (%) 5. enhancing the current assets. Therefore.21* HK34. This is the figure that investors should use to compare with yields and interest rates of other financial product.54 5. The indicator or value that investors should focus on is the distribution per unit (DPU) yields. Dividend Yield of Property Companies for FY2004 Name of Company Capitaland Pte Ltd City Developments Ltd Dividend Paid (cents) 4.48 9. Distribution per Unit (DPU) = Distribution Income/ Number of Units in Issue DPU Yield = DPU/ Market Price Higher income from better operations and performance of the REITs would thus lead to a higher DPU yield. Several factors such as acquiring yield-accretive properties. there will be new issue of units and as a result tend to dilute the DPU. ** Figures taken from UBS Investment Bank Seminar at Capitalizing On Domestic And Cross Border REITs seminar on 26th April 2005. In addition. it is important to know if the property that is to be acquired is a yield-accretive one which has the potential to provide good levels of income.71 HK6. it can be seen that the yield that investors can get from investing in REITs are generally much higher those companies that are in the same property industry.40 4. by comparing the forecasted DPU yield with the actual. Investors should note that when REITs make new acquisitions. the yields of the REITs have -5- .8 6 Price as at 31st Dec 2004 2. occupancies.14 8.25 0.98 * Pro-rated figure to compare Year 2004.
50% of CapitaMall Trust and Fortune REIT respectively when they were first listed. The group is currently accessing 2 to 3 proposals and if they succeed. The new S$500 million industrial REIT will be the first in Singapore that is not affiliated with a developer.which will hold a 74% interest in Wisma Atria and a 27% stake in Ngee Ann City .at the end of this year. Cambridge has signed up 25 to 30 buildings. Macquarie Industrials and Macquarie Retail. with a total REIT market worth US$9. A strategy that the REITs have considered is in overseas acquisition of yield accretive properties. creatively maximizing lettable space to attract and maintain tenants thus increasing its income base. Yield-accretive properties in Singapore would soon be snapped up quickly and the availability of such of properties will become limited. It was reported that Parkway Holdings is looking into a possible REIT.is awaiting regulatory approval to become the 7th Singapore REIT. controlled by German insurer Ergo. REITs Environment In The Near Future As the REITs market continues to grow. ‘Investment bank UBS has predicted that Singapore could see another US$1. while others planning REITs include CapitaLand. who aim to list a REIT holding 21 China malls by end of next year (batch one). who is expected to list an office REIT by March next year. REITs will soon encounter challenges to their growth. Prime REIT . Singapore ranks behind Australia and Japan. reports have shown that many have become interested in setting up REITs in Singapore as well as around Asia. Hong Kong could also see another four REITs listed in the coming months . In addition. has already filed a prospectus for IPO.Link . REITs companies would need to draw up strategies in order to improve their growth.5 billion as at end June 05. Shopping mall-based Centrepoint and office property-based Keppel Land REITs are expected to come to the market while shopping mall-based Prime REIT. Currently they are managing 3 hospitals in Singapore and 4 more around the region. -6- .06% and 6.Cheung Kong. they will be the first to launch a healthcare REIT in Asia.Article in Business Times. Due to the popularity of REITs.’ . Guangzhou Investment. 25 August 2005 – With so much potential competition arising. it is important to continue enhancing their current property assets.1 billion worth of listed property trusts entering the market in the next six to nine months.fallen to below 6% as compared to the initial yields of 7. Another REIT that is expected to list by the end of the year is Cambridge Industrial REIT. while Malaysia will see the listing of YTL and Landmark REITs. This would provide diversification in geographical location and market cycles. and Keppel Land.’ – UBS Report ‘Rival financial centre Hong Kong is set to launch its first REIT .
html www. CapitaCommercial Trust Annual Report 2004.com.Conclusion REITs have proven to have a good track record and will remain attractive with the support from the Singapore government to make Singapore an attractive place for REITs listing.sg www.sgx.fortune. However.com/LeftNav/Bond+Basics/2005/Real_Estate_Real_Return_Basics. 25 August 2005 -7- .com/annual/ar04/pg40.com/press4.capitamall.reitnet. References Websites www.htm www.deacons. Ascendas REIT Annual Report 2005 Suntec REIT Financial Statements for period from 1 Nov 2004 to 31 March 2005.hk/eng/knowledge/knowledge_153.html www. Article Feature on The Edge by Christopher Tan – Investing in REITs.com/fortune/smallbusiness/articles/0.15114.html www.com.com/personalfinance/basics/archives/2003/01/REITs. we should be mindful of the risks stated above particularly the increasing aggressive acquisition by REITs and any potential deterioration in the quality of management.00.cfm www.asp www.pimco. for example the waiver of stamp duty and removal of most of the qualifying conditions relating to tax transparency that will continue to stimulate and drive the growth of REITs market.investinreits. Notes from seminar on Capitalizing On Domestic And Cross-Border Real Estate Investment Trusts.361075. Business Times.com/reits101/ Documents CB Richard Ellis Report .kiplinger.capitamall.com/learn/faq.htm www.Challenges Ahead As Singapore’s REIT Market Expands.
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