Investing in properties is a Singapore Dream.
Who wouldn’t like to own something that pays you recurring, passive income quarter after quarter, year after year, no matter what’s going on in the world today?
You see, I’m sure you’ve heard of friends and relatives happily sitting on properties collecting income.
What’s more, some of the wealthiest people in Asia have built their wealth on properties.
No matter what, investing in properties is one way to get rich.
But you’ll agree with me, buying properties is a huge commitment.
And it’s not cheap if you want to be a landlord in Singapore.
The thing is, you need to find your own tenants, manage them and sometimes even have to deal with silly issues, like tenants complaining about replacing lost keys, while you’re enjoying your holidays.
That’s why, to me, REITs are a perfect way to get you started to grow your passive income.
Contents
1. What are REITs? Any why buy them?
2. How much dividends can you make from Singapore REITs?
3. What are top 10 REITs in Singapore?
4. Should you keep or reinvest your REIT dividends?
5. How to exactly pick the right Singapore REIT?
6. How can you start investing in Singapore REITs?
What are REITs? And why buy them?
At first glance, REITs might sound complex, but it’s not.
REITs make money exactly like how a bank does.
REITs borrow money, then use it to buy properties that pay them a higher interest rate, or property yield.
And they can keep buying as many properties as they like, just by borrowing over and over again.
I call REITs a “virtual bank”.
The key difference between a bank and REIT is that banks take in “short-term” deposits and lend out to companies and people at a higher yield.
While REITs borrow “short-term” money and invest in properties at a higher rental yield.
For instance, CapitaLand Integrated Commercial Trust (formerly CapitaLand Mall Trust) borrows money from banks to buy and own several iconic shopping malls like Raffles City Shopping Centre, Junction 8, Funan Mall and many others.
So, if you buy CapitaLand Integrated Commercial Trust today, you’d get to own all these retail properties and collect their rental through dividends at a very low cost.
But more importantly, CapitaLand Integrated Commercial Trust professionally takes care of all the properties for you — from finding new tenants, to collecting rent from tenants and property maintenance.
This saves you the pain of actually running the properties yourselves.
How much dividends can you make from Singapore REITs?
Now, the single most important thing about REITs, and why they’re so popular is this.
REITs, by law, are required to pay out at least 90% of their taxable income to shareholders as dividends.
That’s why, REIT investors can collect between 4% to 8% of dividend yield year after year.
Dividend yield, is simply taking the amount of dividends paid by REITs dividend by the current share price.
That’s how Singapore REITs like Keppel Pacific Oak REIT, Prime US REIT and Manulife REIT can pay you a high 8% dividend yield (REITs below are randomly selected).
Check out my guide on How to Live off Dividends in Retirement.
Singapore Exchange has also released a chartbook here showing Singapore REITs yielding at least 6%.
Source: SGX Stock Screener, Dividend Titan
The type of “safe” yield you get from REITs not only outpaces inflation, it beats the Singapore government yield and cash deposits you put with the bank.
The average Singapore REITs (and including property trusts) has a 6.2% dividend yield far beating the Straits Times Index (STI), the Singapore government 10-year bond yield and Singapore fixed deposit rate by a good margin (see below).
Source: Singapore Exchange, Bloomberg
But, just like any stocks, a REIT’s share price bounces up and down.
Last year, when the Covid-19 pandemic hit, many Singapore REITs came crashing down.
And here’s the thing, many high quality REITs like Keppel REIT, Frasers Centrepoint Trust and CapitaLand Integrated Trust all continue to pay out their attractive dividends.
If you’re a long term investor, and don’t mind how prices move in the short term, REITs are an excellent way to grow your wealth safely and profitably.
What are top 10 REITs in Singapore? And why people like them
Today, there are 44 Singapore REITs listed on the Singapore Exchange.
And if you’re starting out investing in REITs, you’ll probably want to first check out the 10 biggest REITs in Singapore, listed by market capitalization.
Market capitalization is a simple measure how much REITs are worth. It indicates how much people like them, but does not reflect how well REIT’s properties actually perform.
Source: SGX Stock Screener, Dividend Titan
You can check out Your Retirement Guide: 8 Best Singapore REITs to Buy Now
Should you keep or reinvest your REIT dividends?
Now, have you ever wondered if you should reinvest these dividends or simply take them in cash?
The beauty of investing in Singapore REITs is these REITs offer you a dividend reinvestment plan (DRIP).
When you enroll a DRIP, the cash dividends automatically be replaced by fractional REIT shares instead.
You don’t have to pay transaction costs this way, but if you think about it, it’s basically reinvesting your cash dividends into new REIT shares.
If you ask me, my preference is to automatically reinvest dividends, especially if you’re growing wealth for the long term.
And you want to reinvest dividends in the high quality Singapore REITs that have safe dividend payouts.
When not to reinvest dividends automatically?
Of course, DRIP may not be for everyone. For instance, you need those dividends to pay off immediate living expenses.
Also, many financial advisors suggest to hold enough cash for months as a “safety net” if something bad happens.
Then, you want to collect your dividends instead of reinvesting them to make sure you have enough cash reserves.
Whether you’re retired or not, the power of DRIP can grow your wealth much faster over time.
In the chart below, the iEdge S-REIT Total Return Index have more than doubled its returns since Feb 2011, after reinvesting dividends from Singapore REITs.
Singapore REITs have also outperformed the Straits Times Index.
In fact, even during the REIT crash last year, performance has still been solid.
This is truly the power of dividend investing and its compounding effect.
Source: Singapore Exchange, Bloomberg
This is truly the power of dividend investing and its compounding effect.
How to exactly pick the right Singapore REIT?
There are 5 key points you need to know:
Is the REIT well-managed?
Do the REITs’ properties have good locations?
How diversified are the tenants?
What’s the average lease to expiry?
What is the occupancy rate?
1. Is the REIT well-managed?
A quick way to figure out whether a REIT is well-managed is to check whether the REIT is adding value to investors over the years.
Don’t simply look at the revenues and net property income. Check the REIT’s historical Distribution Per Unit, or DPU over the past five to 10 years.
DPU is simply a measure of how much dividends an investor gets to keep for every unit of REIT owned.
A good indicator is when the DPU grows year after year.
Also, a REITs gearing ratio is usually stable and is not too close to the Monetary Authority of Singapore’s gearing ratio limit of 50%. This reflects management ability to manage a REIT’s debt.
2. Do the REIT’s properties have good locations?
Now, good location here means whether the properties are placed “strategically” near key transport nodes like MRT stations or bus interchanges.
In other words, I want to find properties that are easily accessible.
For example, high quality industrial REITs are usually placed near highways and have direct access to airports and seaports.
You see, when you have properties with good locations, it’s easy to attract tenants to want to rent the property space.
This makes it easier for the REIT to find or replace existing tenants.
If you’re unfamiliar with these properties, You may want to avoid the REIT.
For example, Saizen REIT, which defaulted a few years ago, had many unprofitable residential properties which even I have no idea where they exactly are.
One quick way is to use Google Map to locate these property locations.
3. Are the REIT’s tenants well-diversified?
REITs usually have single-tenanted or multi-tenanted. A good yardstick for tenancy profile is to have each tenant taking up less than 7.5% of a REIT’s gross rental income (or revenues).
This is not a hard and fast rule, but my own estimate to tell you that tenants are well-diversified.
This keeps you safe and “worry-free” if one tenant decides to pull out. You don’t have to worry about a massive drop in rental income.
For instance, Starhill Global REIT leased out Ngee Ann City to Toshin Development Singapore, which owns Takashimaya department store.
The risk here, of course, is this tenant alone already takes up 22% of Starhill Global’s property portfolio.
I’m not saying Starhill Global is risky, but it’s good to ask yourself — what happens if Takashimaya decides to pull out of the building one day — would Starhill Global be able to quickly attract a big, anchor tenant to replace Takashimaya at an attractive rental rate?
4. What’s the REIT’s average ‘lease to expiry’?
We want to know what’s the average duration of expiring leases.
This is important, since we know how the REIT manages any expiring leases in the near future.
More importantly, we can estimate if there’s any one year if there’s a huge expiring lease to be renewed and whether the REIT can commit to these leases.
5. What’s the REIT’s occupancy rate?
Why? Because you want to know how much of a REIT’s properties are being rented out.
It shows the quality and demand of the properties. In Singapore, good REITs can have their properties’ occupancy rate above 95%.
How can you start investing in Singapore REITs?
Willie Keng, CFA
Founder, Dividend Titan
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