The only way to retire in Singapore is to own Income Generating Assets. 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 was shown that Asia-Pacific high net worth individuals have 23% of their assets allocated to real estate, but the US ultra-wealthy are more sophisticated in investing their money.
Out of the 29% real estate exposure, these ultra-high-net-worth-investors in the US have only 15% of their assets in physical real estate, but 14% in other forms such as Real Estate Investment Trusts (a.k.a REITs).
Real Estate Investment Trusts are the modern secret asset which consistently delivers good returns to the wealthy. The good news is that unlike physical real estate, which requires a large capital outlay, any one of us can participate in a REIT investment in Singapore.
If you don’t have millions of dollars to build a property empire for your retirement, REITs should be your first stepping stone.
Why invest 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 the 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 costs than owning and managing a direct property portfolio. The table below outlines the differences between direct property investment and property security investment.
What are Real Estate Investment Trusts
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 eats at Macdonald’s because he owns the stock, if you were a Capitamall Trust shareholder, you should spend all your shopping time in these 16 malls and encourage your friends to do the same.
If you find the toilet wasn’t cleaned properly in one of the malls, you can request the management to look into it during the Annual General Meeting because the managers in Capitamalls work for you.
Well, that was a bit exaggerated :). But that is what a REIT is all about. In the case of Capitamall,
- You are a shareholder in the shopping mall business
- You make money if the malls are doing well.
- You don’t need to collect rent 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 REITs
We are lucky that Singapore is one of the early adopters to develop REIT markets.
In fact, CapitaLand’s real estate fund management businesses are so successful that the company has one of the largest property portfolios 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 markets for REITs. If you try to search for 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 was poured into the Singapore REITs sector in the past few years.
As of May 2015, there are 28 REITs listed on the Singapore Exchange and the average yield is about 6.1%.
These REITs are mainly in 5 sectors:
- Industrial & Office REITs
- Residential REITs
- Diversified REITs
- Speciality REITs
- Retail REITs
Risks of REIT investing
Just like any other types of investments, REIT investing 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 fluctuations can occur because the REIT is traded on a stock market
- Income Risk – Dividends may not be paid if a REIT reports an operating loss.
- Concentration Risk – If the substantial income of the REIT is derived from one or a few properties
- Liquidity Risks – 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.
Update (2020): this article was published in 2015 and true enough, REITs had a stellar run in the next 5 years. However, every asset has to go through the boom and doom cycles. REITs may be overpriced now. I recommend you read my latest updates:
Singapore REIT fund
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 for 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.
Below is the fund’s current allocation.
In fact, a REIT is just one way to gain exposure to property investments. With the increasing popularity of “property securitization”, there are ample opportunities globally for you to tap into property markets without physically owning a property.
What if you need more help
Whether you are new to investing or you have invested for a while, here are the questions you should ask yourself:
- Do you already have Income Generating Assets in your portfolio?
- Can you improve your investment holdings by adding high dividend-yielding stocks or funds?
As a licensed financial adviser, I help my clients construct and manage income portfolios for their retirement needs. If you are interested in finding out more about my services, submit your request below for a non-obligatory discovery meeting.
I am doing the research on long-term rental residential market-abroad experience. (I am a Chinese). Does any REITs related to this market?
The REIT listed in Singapore are mainly commercial properties, not residential properties.
Good day Ivan,
From your knowledge could you tell me if you know some REIT investments vehicle with fixed
guarantee income p/year ? In positive What are the best to get for a long term investment?
Thanks so much for your kind reply.
REIT does provide good income over long term but there is NO guaranteed income. If you want guaranteed income, you should try Retirement Income Insurance.
My biggest fear when buying multiple REITS is actually the constant monitoring needed. There is this fear that at any time, one of the REITs I own can try to raise funds via rights issues or other similar instruments and if I happen to be busy during that typical 3 week period, I lose out due to inaction. Happened to me once. I was busy with work and my rights expired before I knew I had them.
That is a very valid concern. Managing multiple REITs is not easy. Why not invest into Phillip Singapore Real Estate Income Fund which I mentioned in this article?
Hi ivan, what an informative topic. Im still a student, what can you suggest to have my own income assets?
If you are a student, the best income asset is yourself. There is no other thing that can generate more cash flow than your own income. In financial terms, we call it human capital.
There will be a time where your financial asset can generate more income than your human capital. that is the time you can achieve financial freedom. 🙂
What are the REITS you can recommend. How to choose a REITS? Can you advise?
In my humble opinion, I think retail investors are better off to let fund managers do the job. People may think buying REITs is just like buying the underlying properties, but as REITs is in the form of a security, choosing good REITs is as hard as choosing a good stock.
I have an earlier post to explain some not-so-obvious risks of investing in REITs.
It seems interesting about the reits investment. I am confusing about the Real estate income fund or trust fund. Why can’t I invest on my owe instead of invest by the fund manager. Is it the good time to invest on REIT now?
You can invest REITs on your own, you can buy them from Singapore exchange if you have a CDP account.
great read. good info for anyone wondering how to beat the ABSD mess :))
On top of that, I just saw the news that $80 million was collected in seller’s stamp duty since 2011 for those people who sold properties within four years. There are huge losses in residential property markets.
What are top 5 Reits in spore with high potential and hig6hest returns.
That depends on your definition of TOP. Top performance? top dividends? top popularity?