Continuing from the previous post Understanding Singapore REITs Part One – REIT Categories, we will explore Office REITs, Retail / Office Hybrid REITs, Hospitality REITs and Residential REITs.
Office REITS – Low-Medium Defensiveness / Medium-High Dividend Yields / Medium WALE
Frasers Commercial Trust, CapitaCommercial Trust, Keppel REIT
Office REITs are generally one of the least defensive REITs you can invest in the Singapore stock exchange. Office assets typically suffer from oversupply in Singapore. Suitable office locations are mushrooming all around Singapore and many companies these days may not see the need to be located in the city. Even Grade A offices may lose substantial tenants as many companies choose to cut costs when the rental gets too expensive in the city center. Another factor is that many of the tenants in the city are European/American financial companies which are bearing the brunt of this 2008-2011 financial crisis, hence downsizing is possible. In the 2008/2009 financial crisis, office rental yields dropped substantially, affecting distributions dramatically.
Retail / Office Hybrid REITS – Medium-High Defensiveness / Medium-High Dividend Yields / Medium WALE
Mapletree Commercial Trust, Starhill REIT, Suntec REIT
As the name suggests, these REITs are typically integrated developments which have both offices and maybe residential on top of the shopping mall like Vivocity, Suntec etc. Depending on how much of the rental is derived from the office versus the shopping mall, the defensiveness and yields lie in between that of offices and retails. Mapletree Commercial Trust has Vivocity as the key asset, Starhill has Takashimaya and Wisma Atria and Suntec REIT has Suntec Convention Center and Shopping Mall. Hybrid REITs are good to own especially if you have limited capital as the REIT itself already benefits from being diversified with Retail/Office/Residential assets; get defensive qualities of the retail and still enjoy large upside on office rentals when the economy booms.
Hospitality REITS – Low Defensiveness / High Dividend Yields / Low WALE
Ascott REIT, CDL Hospitality Trust
Hospitality REITs are typically made up of hotels and serviced residences. These REITs are probably the most cyclical of all the REITs as hotel occupancy rates are based on tourist arrivals. Ascott REIT has a large percentage of the portfolio worldwide and is thus more subject to the global economy. CDL Hospitality Trust on the other hand is more focused on Singapore hotels. Given the huge boost in tourist arrivals from the two Casinos, first F1 night race in the world and many other initiatives, tourist arrivals to Singapore look poised to continue booming. However, a global downturn may dampen tourism as well. For CDL Hospitality in particular, it does not make sense to look at WALE, but at average occupancy rates and average room rates as key metrics instead. Both are key beneficiaries if global tourism industry is to improve.
Residential REITS – Low-Medium Defensiveness / Low-High Dividend Yields / Short WALE
Saizen REIT (Japan Only)
Saizen REIT is the only pure play residential REIT listed on the Singapore exchange. My experience with Singapore rental properties that lease expiry profiles are low, with many tenants leaving after 1 year contract is up. With the high tenant turnover in residential properties in Singapore, I hardly think they make good investments for REITs, hence Saizen REIT only invests in Japanese residential properties. While I am not familiar with Japanese properties, what I hear is that many Japanese do not have the means to buy houses and hence may rent a house for most of their lives, unlike Singaporeans who can buy affordable HDBs. However, Saizen has defaulted on a loan before, incurring extremely high default costs. You should study the REIT very carefully if you are interested, I am not invested and I don’t intend to.
So in summary, ranking by various qualities
Defensiveness (From Highest to Lowest) – Healthcare, Retail, Retail/Office Hybrid, Industrial, Office, Residential, Hospitality
Dividend Yields (From Highest to Lowest) – Hospitality, Residential, Office, Industrial, Retail/Office Hybrid, Retail, Healthcare
- You can see dividend yield is pretty much inversely correlated to defensiveness.
Weighted Average Lease Expiry (WALE) (From Highest to Lowest) - Healthcare, Industrial, Retail, Retail/Office Hybrid, Office, Residential, Hospitality
However, the guide is just general as REITs may have different risk levels due to other factors like huge sponsor, access to capital, debt rating, leverage ratio, quality of management, location of properties and so on. Further analysis is required to understand the REITs before investing. As you can see different categories of REITs offer different qualities you may be interested in. A good portfolio should always be diversified with different kinds of REITs. Now that you understand the categories better, you can tweak your portfolio percentages based on your risk profile. For example, if you are more risk adverse, you may want to have a higher percentage of your portfolio in healthcare and retail. If you are willing to take more risks, you may want to have a higher percentage of your portfolio in industrial, office and hospitality.
That’s all for Part 1 of Understanding Singapore REITs! In the next part, I will discuss about analyzing the REITs such as Net Asset Value (NAV), leverage ratio etc.
For further reading, you may be interested in: