The only way to retire in Singapore is to own Incoming Generating Assets. In Part 1, I have discussed how you can use optimally leveraged and discounted property to generate good income for your retirement. However, there is a problem.
While Asian investors are still trying to catch the last train of purchasing physical properties, the ultra rich from the western world have been quietly shifting their assets from physical property to another type of asset.
In a recent survey, it is shown that Asia-Pacific high net worth individuals have 23% of their assets allocated to real estate, but US ultra wealthy are more sophisticated in investing their money.
Out of the 29% real estate exposure, these ultra-high-net-worth-investors in US have only 15% of their assets in physical real estate, but 14% in other forms such as Real Estate Investment Trust (a.k.a REIT).
Real Estate Investment Trust is the modern secret asset which consistently delivers good returns to the wealthy. The good news is that unlike physical real estate, which requires large capital outlay, any one of us can participate in REIT investment in Singapore.
If you don’t have millions of dollars to build a property empire for your retirement, REITs is your first stepping stone.
Why invests in alternative real estate assets?
In today’s context, especially in our tiny red dot, the relationship between land, property and wealth is more complex and more commercial than ever before.
As Dominic Whiting rightfully wrote in his book, “Playing the REITs Game: Asia’s New Real Estate Investment Trusts”,
The rapid growth of cities presents its own difficulties for property investment. Once-fashionable areas can lose their glitter in just a couple of years, as new roads or a new airport direct business to an up-and-coming district. A bustling shopping center can empty almost overnight if a glitzier venue moves in down the road and pulls in brand-name retailers.
Historically, yields from global real estate securities, as represented by EPRA/NAREIT Index, were constantly higher than yields from global stocks and bonds.
In addition, investing in property securities can provide efficient access to property markets at much lower cost than owning and managing a direct property portfolio. The table below outlines the differences between direct property investment and property security investment.
What is Real Estate Investment Trust
A REIT is a collective investment vehicle. It pools the capital of many investors to purchase and manage income generating properties. Let me give you an example.
The first REIT listed on the Singapore stock exchange was Capitamall Trust in July 2002. Today, Capitamall Trust has a portfolio of 16 shopping malls, they are
- Tampines Mall
- Junction 8
- Funan DigitaLife Mall
- IMM Building
- Plaza Singapura
- Bugis Junction
- Sembawang Shopping Centre
- Raffles City Singapore (40.0% interest)
- Lot One Shoppers’ Mall
- Bukit Panjang Plaza
- Rivervale Mall
- The Atrium@Orchard
- Clarke Quay
- Westgate (30.0% interest).
Just like Warren Buffett always eat Macdonald because he owns the stock, if you were a Capitamall Trust shareholder, you should spend all your shoppings in these 16 malls and encourage your friends to do the same.
If you find the toilet not clean in one of the malls, you can request the management to look into it during Annual General Meeting because the managers in Capitamalls work for you.
Well, that was a big exaggerated :). But that is what REIT is all about. In the case of Capitamall,
- You are a shareholder of the shopping mall business
- You make money if the malls are doing well.
- You don’t need to collect rental from the tenant or fix the toilet by yourself
- There is an army of professionals managing the property for you
- This asset continues to generate cash inflow to your wealth funnel.
- You can buy and sell this business with a click because the REIT is traded on exchanges like other stocks
The case of Singapore REIT
We are lucky that Singapore is one of the early adopters to develop REITs markets.
In fact, CapitaLand’s real estate fund management businesses is so successful that the company has one of the largest property porftolios in Asia. Besides CapitaMall Trust, the company also manages:
- Ascott Residence Trust – World’s first pan-Asian serviced residence REIT
- CapitaLand Commercial Trust – Singapore’s first listed commercial REIT
- CapitaLand Retail China Trust – Singapore’s first pure-play China retail REIT
- CapitaMalls Malaysia Trust – Largest pure-play shopping mall REIT in Malaysia
Singapore REITs have been delivering consistent returns
Singapore has one of the best performing REITs market. If you try to search high dividend yield stocks in SGX, REITs are dominant in the list.
DBS’s research showed that Singapore REITs (S-REIT) have delivered more than 6% average yield for more than a decade.
No wonder tons of smart money around the globe were poured into Singapore REITs sector in the past few years.
As May 2015, there are 28 REITs listed in SGX and the average yield is about 6.1%.
These REITs are mainly in 5 sectors:
- Industrial & Office REITs
- Residential REITs
- Diversified REITs
- Specialty REITs
- Retail REITs
Risks of REIT investment
Just like any other types of investments, REIT investment has its own risks. The risks associated with a REIT investment vary and depend on the unique characteristics and the geographical location of the investments.
Don’t simply look at the expected yield, but also consider the concentration, quality and lease length of the underlying properties.
Some of the risks associated with investing in REITs include:
- Market Risk – Price fluctuates because it is traded in stock market
- Income Risk – Dividends may not be paid if a REIT reports an operating loss.
- Concentration Risk – If substantial income of the REIT is derived from one or a few properties
- Liquity Riks – the real estate fund itself may be relatively less liquid compared to stocks and bonds
- Leverage Risk – Where a REIT uses debt to finance the acquisition of underlying properties
- Refinancing Risk – Higher refinancing cost due to interest rate movements or unable to secure refinancing at all.
Therefore, if you are interested in becoming a Singapore REIT investor but do not have the time or knowledge to do it, maybe it is better to leave it to the professionals.
Singapore REIT fund
It is unfortunately Singapore does not have a REIT ETF, but we do have one REIT unit trust called Phillip Singapore Real Estate Income Fund.
This fund is managed by Phillip Capital Management and is available to both cash and SRS investment.
The fund seeks to achieve medium to long term capital appreciation and a regular stream of income by mainly investing in REITs listed in Singapore, with a maximum amount of 10% into REITs listed outside Singapore. The fund may also invest in warrants, bonds and convertible bonds issued by the REITs.
In a nutshell, the fund is trying to rotate between different sectors in Singapore REITs and deliver a consistent return, which is exactly what most people have no time, no money and no interest to do. (Click here if you want to know how to invest in Singapore REITs through this fund)
Below is the fund’s current allocation.
In fact, REIT is just one way to gain exposure to property investments. With the increasing popularity of “property securitization”, there are ample opportunities globally for us to tap on property markets without physically owning a property. Subscribe to my newsletter if you want to know more.
What you can do now…
Whether you just new to investing or you have invested for a while, here are the questions you should ask yourself:
- Do you already have Income Generating Asset in your portfolio.
- Can you improve your investment holdings by adding high dividend yielding stocks or funds.
To help you get started, I offer a free non-obligatory investment discovery meeting. During this 30-minute one-to-one discussion, I will help you
- Define your investment goals
- Briefly evaluate your existing investment holdings
- Understand the concept of income investing
- Analyze if securitized property investment is suitable for you
If this is for you, simply fill up the form below to apply and I will get back to you for the time slot allocated to you.