REIT Investments

REIT investment was introduced to Singapore in late 2002. The first REIT to list here was CapitalMall Trust. This REIT was only successfully listed during its second attempt after the first attempt failed due to unfamiliarity of such instrument in the local market resulting in low subscription interests then.

Since then, REITs have grown its popularity among the investment community here due to its high yield at IPO of 6-8% p.a. and the investors here becoming more knowledgeable. Following CMT's foot step in listing, AREIT, Fortune, CCM, Suntec, Mapletree and Prime have followed suit.

The returns for pioneer investors in CMT & AREIT have been very rewarding as the trading prices has grown from IPO price of 96 cts and 88 cts to $2.35 and $2.24, representing 145% and 155% capital appreciations respectively while the yield has grown to est 11% and 10.9% based on IPO price.

The good thing about REITs is the DPUs are relatively predictable due to long period of the lease tenors and the fundings fixed (equity and loans) for the investments. A REIT can grow by asset enhancement of its existing properties, e.g. converting certain idle space into leaseable units or dividing the space into smaller lease plots with higher rental/area or simply increasing the rent due to improved human traffice flow or good economy, and more importantly by new asset acquisitions which can be observed by both CMT & AREITs.

The best point in time to invest in a REIT is at its IPO with a reasonable yield to be expected, which I deemed to be minimally 5.5%- 6%, watch it grows over time due to the strategy as above which should gradually grow its yield. At this yield, there is a chance for trading price appreciation as the existing REITs are trading at 4.2% to 5.5% yields. Moreover, setting a minimal yield gives the investor a safety buffer against unrealised loss in capital if the IPO does not perform as expected. Having said that, REIT investment should be held for long term to enjoy the full benefits of capital appreciation and increasing yields. This is an investment not to be missed out in one's retirement portfolio.

But what is the pitfall of REITs investing? As REITs are funded by a portion of loan, it is vulnerable in a raising interest rate environment especially for a prolonged period. REIT usually tries to mitigate this impact by fixed the interest rates for certain portion of its loan and increasing rent (on the pretext that higher interest rates are due to better economic conditions). But I doubt increasing rent can catch up in time to reduce the impact of the interest costs. I view the location of the underlying proporties of the REITs as very important as a good location is not unlike a toll bridge. As REITs operates in the property market, it may be affected by the supply glut (esp in the case of AREITs), which is a point to watch out.


So when is the best time to sell a REIT? I keep pondering over this question and currently, I still prefer not to take profit on my REITs purchased at IPO (and lower) prices. This is due to very high yield (>10%) that I'm getting now and that the REITs are still in an acquisition mode. Existing investors always benefits from new acquisitions (no matter how small) as long it is done at yield accreditive prices. CMT has announced plan to grow to S$5B asset base compare to less than S$3B now over 3 years after which it will start looking for overseas assets. Hence, the future looks bright for exisiting investors.

I recently subcribed for Mapletree logistic at 6% IPO yield and took profit at 45% gain. Why did I sell? Firstly, this is a relatively small REIT, about S$200M+ in assets. So any large acquisition is unlikely to be done at fast pace (compare to AREITs) as its capital base is small. Also, at such a small size, new loans taken up would be quite subtantial over the existing loans and the average cost of funding is likely to be skewed towards the new loans (and bear in mind that the interest rates are expected to be increasing in the mid term). So a quick snag at a price yield of <4.5% for reinvestment elsewhere is a prudent move although holding at 6% IPO yield is not too bad a deal either, take your choice!

I gave Prime REIT a missed due to its projected yield of only 5.12% at the IPO of 98cts. Not much room for capital appreciation at the current price. Also, it only holds a minority stake in the Ngee Ann City which means the effect of asset enhancement may not be felt so much and translate to DPU. Anyway, it will be interesting to watch how this IPO is going to be traded over the next few months to assess how the market preceives this REIT.

I will also be keeping watch on Suntec REIT for now, assessing the impact of the recent apprehensions about the proposed acquisitions and the loss of a major office tenant in 2 years' time.