Industrial REIT, Healthcare REIT, Hospitality REIT and Singapore REIT Index

The following REITs sectors might not look like the typical REITs property assets you are aware of and might even surprise you.

That is do you know that REITs property extends to industrial warehouse, data center, hotel and even hospital?

Once we are done for that we will get to the last topic of Singapore REIT Index

Grab another cup of coffee.

If not, let's jump right in!


WARNING!

DO NOT RELY ON THE DATA BELOW  FOR YOUR INVESTMENT. THE DATA IS NOT UP TO DATE AND IT IS BASED ON EARLY JAN 2016.

Industrial REIT

NameSymbolDividend YieldProperty YieldDebt To AssetsPrice / NAVWALEDistribution Frequency
AIMS AMP REITO5RU8.22%6.60%31.20%0.93.5Quarterly
Ascendas REITA17U6.71%5.90%34.70%1.096.1Quarterly
Cache Logistics TrustK2LU9.42%7.50%38%0.944.3Quarterly
Cambridge Industrial TrustJ91U8.68%5.80%37.20%0.844.2Quarterly
MapletreeInd TrustME8U7.13%7%30%1.152.7Quarterly
MapletreeLog TrustM44U7.51%6%34.60%0.864.3Quarterly
Sabana REITM1GU9.97%5.80%37.90%0.681.5Quarterly
Keppel DC ReitAJBU??26.40%1.28.9Semi-Annually
SoilbuildBiz REITSV3U8.39%5.60%36.30%0.974.2Quarterly

Average:

  • WALE: 3.85 (keppel DC excluded, as it’s a outliner)
  • Div Yield: 8.25%
  • Property Yield(cap. rate): 6.28%
  • Gearing: 34%

“Industrial REITs are REITs that hold properties which are primarily used for manufacturing or logistics activities. A typical property profile in an Industrial REIT would include factories, distribution centres and warehouses.Properties in Industrial REITs are typically located away from the Central Business Districts and can exist as a standalone building leased out to multiple tenants, a cluster of buildings within an industrial park or even a standalone building leased out to a single tenant.Prominent Industrial REITs in Singapore include Cambridge Industrial Trust, Mapletree Logistics Trust and Mapletree Industrial Trust.” — 

REITsWEEK.com

The average yield is 8%; currently, there are nine industrial REITs listed on SGX. Industrial REITs have the highest distribution yield among other sectors.

​30 to 60 years land lease - Shorter land leases as compared to other REITs properties mean higher depreciation expenses. Some investors believe this higher depreciation expense is the reason why industrial REITs have a higher distribution yield that is caused by the decreasing denominator of NAV.

Bobby Jayaraman mentioned in his book, “Industrial REITs, however, are on short 30 to 60 leases and undergo much faster land depreciation than other assets. So distribution yield actually should be seen as part income and part capital payout.”

This short lease term also means a limitation on capital appreciation.

Susceptible to country economic performance — Industrial properties are known to be susceptible to economic performance, and demand is largely driven by the growth of the GDP. Assets are least defensive during an economic recession and can suffer from a prolonged recession. Most of the tenants are SMEs, and therefore possess higher risk of defaulting on their rent during a crisis.

In ‘03 to ’04, occupancy for industrial properties was around 70%, whereas suburban retail malls had above 90%. I know this is not a fair comparison; it is just to give you a perspective.

Unable to grow organically — Rent increase for industrial properties is very hard, because the tenants tend to be SMEs and MNCs who aim to save cost by shifting their middle and back office business operations to a business park. In addition, there is pressure from the government to release supply to suppress rent should it increase.

Besides that, asset enhancement does not work well on industrial assets. This means that the only option for growth is through acquisition.

​The advantages of industrial properties include:

  1. Little capital expenditure requirement as their tenants are not too concerned about building aesthetics over cost and functionality.
  2. Economic adaptability needs for industrial spaces, such as a space previously used for a manufacturing operation, can be quickly converted into a warehouse facility.
  3. Easy to build, fast completion time and lower building cost means REIT managers can easily acquire industrial properties should the opportunity present itself.

Additional information for Industrial REITs

SGX, 20 October 2015. Four Industrial REITs Report September Quarter Earnings

​REITsweek. Industrial REITs101

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Hospital/HealthCare REIT

NameSymbolDividend YieldProperty YieldDebt To AssetsPrice / NAVIndustryWALEDistribution Frequency
First REITAW9U6.88%7.80%32.90%1.18hospital 10.2Quarterly
Parkway Life REITC2PU5.50%6.20%34.10%1.37hospital 9.9Quarterly

Average:

  • ​WALE: 10.1 years
  • Div Yield: 6.19%
  • Property Yield(cap. rate): 7%
  • Gearing: 33.5%

Health Care REITs are REITs that specialize in various types of health care properties such as hospitals, nursing homes, medical centres and assisted living facilities for the elderly and disabled. It is important to note that Health Care REITs are not engaged directly in the business of providing these health care services but are instead leasing the properties that they hold to tenants on a long term basis.These tenants could be either a single master lessee of the facility or multiple tenants renting multiple units within the property.Prominent Health Care REITs in Singapore include Parkway Life REIT and First REIT.

REITsWEEK.com

Have you seen Mount Elizabeth Hospital, Gleneagles Hospital, and Parkway East Hospital? Yes, these prominent hospitals are managed by the Parkway Life REIT, and now you can own those hospitals!

Healthcare REITs typically lease out their assets to a master lessee (single tenant) on a ”triple net” basis (a lease agreement whereby the lessee agrees to take care of the first net, property taxes/ stamp, second net, building insurance, third net, and building maintenance costs). This is why it is called “triple net.”

In other words, the tenant will pay all the operating expenses of the building in which it operates.

This master lease agreement can be very long such that it can be up to 15 years, which gives a WALE of 10 years. Rental rates come in two forms: Base rent, which is indexed to inflation with a pre-agreed annual increment, plus variable rent, which is based on a fixed percentage of the master lessee’s revenue.

This rental structure limits the downside of the REIT, because the base rent is indexed to inflation and provides the investor a minimum income base. The variable component allows the landlord to benefit from the increased revenue of the hospital. Limited downside and unlimited upside, isn’t this the best of both worlds?

It is said that healthcare REITs possess the same characteristics of a bond, because investors are guaranteed to receive a minimum rental income PROVIDED the lessee does not default on his or her payment.

Advantages

Trending demand for healthcare — Rapid increases in an aging population, the rise of the new, affluent middle class, increased life expectancy, and rising lifestyle-related diseases mean the demand for quality healthcare will be on the rise as time progresses. A healthcare REIT may even qualify as a growth stock!

Recession-proof — As mentioned on the master lease agreement, this allows the REIT to have a minimum rental income coming from its base rent. Whether the economy goes into recession or not has no impact to the REIT, so long the master lessee does not default. The extremely long lease also allows a healthcare REIT to easily ride out a prolonged recession.By the way, healthcare REITs also have a very high distribution yield of 6%!

High barrier of entry — Hospital buildings are guided by public policy; the amount of hospital beds and other medical facilities in a particular region is capped. To run a hospital requires former doctors and experienced hospital managers, which raises the bar for new entrants. All of these factors make it unlikely for hospitals to have an oversupply issue.

Disadvantages

Limited organic growth — The extremely long lease agreement does not allow for rental reversion in which the growth is limited to what is stated in the lease agreement.

High counterparty risk — Healthcare REITs are only as safe as the financial ability of the master lessee to meet his or her rental obligation. Master lessees contribute a very significant portion of the REIT’s total gross income, so it can spell disaster in the unlikely event that the master lessee defaults his or her payment. On the bright side, the master lessees of healthcare REITs are also the sponsors who hold more than 20% of the REITs; this mitigates the risk to a certain extent.

Public healthcare policy risk — Much of our inpatient bills can be paid by Medisave; however, should the government change the amount of coverage or the type of treatment to be covered by Medisave, patient spending power on private healthcare will be reduced. Opt for government subsidized hospitals instead.

Hospitality/Hotel REIT

NameSymbolDividend YieldProperty YieldDebt To AssetsPrice / NAVIndustryWALEDistribution Frequency
Ascott REITA68U6.84%4.90%35.80%0.72hospitality?Semi-Annually

(I do not include stapled security like OUE Hospitality Trust)

A REIT that holds hospitality related properties and short term accommodations such as hotels and serviced apartments are referred to collectively as Hospitality REITs. Hospitality REITs are also sometimes referred to as Hotel REITs in some investment literature. However the term may not accurately encapsulate the full breadth of properties that a hospitality REIT may be involved in such as serviced apartments and other forms of temporary lodging.

REITsWEEK.com

You probably have heard Ascott hotel and seen it in the Raffles Place, but what you don’t know is that it is managed under REIT. Hospitality REIT is similar to hospital REIT in a way that both have a master leasee as a sole tenant, rental income depends on the master lease agreement that have both the base rent and the variable component. This allows REIT manager to receive constant stream of income without being affected by the high fluctuation of tourist arrival.

The quality of the master lessee is more important than the REIT itself, because it determines the rental income. Investing in a hospitality REIT allows investors exposure to our tourism economy.

Key drivers to look out for are tourist arrivals, hotel rooms, Revenue per Available Room[RevPar](nation avg stats), and Incentive Travel, Conventions, and Exhibitions[MICE](Tourism Statistics).

Advantages

Master lease agreement — This limits the downside, because the base rent provides the minimum rental income and allows the REIT to benefit from the upside when the tourism sector is booming.

Benefit from increasing travel — As a gateway city, Singapore benefits from the increasing travel of the middle class in the ASEAN countries. Both business and leisure visitors that stopover in Singapore will create demand for hotels.

Government initiatives for tourism growth — Singapore has transformed itself to be a tourism and business destination. RWS, Marina Bay Sands, and many marquee events like YOG, Formula 1 Night Race, etc., are here to boost our tourism economy. Even better, ASEAN favourable demographics suggest they will keep providing visitors in the near future.

Easily convert into residential apartment — In the unlikely event that oversupply is an issue, a hotel can be converted easily into a residential apartment.

Disadvantages

Very cyclical and volatile — Demand for hotel rooms is dependent upon the prevailing economic conditions. The dotcom, SARS, and ‘08 crises were shown to have a strong impact on hotel revenues with high vacancy rates. On the bright side, master lease agreements provide protection in the form of minimum rent during such events.

Capital expenditure Improvements and renovations of the hotel building, including lobby makeovers and room refurbishments, are required for the hotel to stay in the game. This is unlike retail REITs, where the upgrades are used to achieve higher rental income.

Cross Border REIT

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  • saizen
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  • starhill

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“Cross-border REITs” refers to REITs that have overseas property assets. Some REITs have a small portion of their portfolio that consists of overseas assets, whereas others have their entire property assets stipulated in foreign land.

Below are a few points of which to take note when you evaluate such REITs.

Assets Yield against the Country Risk-Free Rate

Do not compare cross-border property yields against Singapore’s national average directly, because the yield from most overseas properties will be much higher than Singapore’s because of their higher borrowing cost and risk-free rates (10 years gov bond).

So when evaluating overseas properties, investors should compare it against the risk-free rate of the country and decide whether the risk premium is worth investing.

Currency Risks to Consider

Even though cross-border REITs are listed in Singapore and distributions are paid in Singapore dollars, it does not mean the investors are fully protected from currency risk. The amount of distribution paid to unitholders may be lower when the SGD strengthens (e.g. suffers from forex loss).

REITs managers know that, and typically hedge against such foreign exchange loss.

​Local Supply & Demand

​Each market has its own supply and demand dynamics. What is seen as high defensiveness for retail property assets in Singapore does not mean they would perform the same way in another country. Similarly, the economic landscape for office assets in a foreign land is very different as compared to Singapore.

Singapore REIT Index...

(FTSE ST REIT Index)

FTSE ST Real Estate Investment Trusts is the Singapore REIT index under FTSE which is also the provider of the Straits Times Index. The index tracks the total price of all the S-REITs under a market-capitalization weighted approach.

FTSE ST REIT Index

At the time of writing, the 5-year CAGR is 0.37% for its price-only return. If you were to add in the average distribution of 5%, the performance is actually quite good given that the same period for STI total returns is only 0.61%.

For more information on FTSE ST REIT Index:

Is there ETF for S-REITs like STI ETF?

​Unfortunately, as of now there is no ETF for S-REITs like what we have for STI.

​Phillip Singapore Real Estate Income Fund

However, if investors are still interested in getting exposure on S-REITs, then the alternative is to invest in a REITs unit trust.

The advantage of investing in a fund is that investors do not have to worry about picking the wrong stocks or finding the time for research, because the fund manager will be investing on your behalf.

However, note that this unit trust is not a passive index fund like SPDR STI ETF, which has an investment objective of replicating the performance of STI index. This fund is an active fund, which means the fund manager exercises discretionary stock selection that they deem will produce returns for investors.

Investment Objective

The Sub-Fund seeks to achieve medium to long term capital appreciation and a regular stream of income by mainly investing in REITs listed in Singapore, including warrants, bonds and convertible bonds issued by the REITs.

Investment Focus and Approach

It is the Managers’ intention to primarily invest the assets of the Sub-Fund into REITs listed in Singapore. The Managers may also invest up to a maximum amount of 10% of the Net Asset Value of the Sub-Fund into REITs listed outside Singapore.

The Sub-Fund will invest in REITs that demonstrate capital appreciation opportunities and sustainable dividend growth potential.

The Sub-Fund intends to offer regular dividends through quarterly distributions (or such other frequency as the Managers may determine from time to time).

The Managers may only use financial derivative instruments for such purposes as may be permitted under the Code, and for so long as the Phillip Singapore Real Estate Income Fund is a Qualifying CIS, for such purposes as may be permitted under the Standards of Qualifying CIS. As long as the Phillip Singapore Real Estate Income Fund is a Qualifying CIS, it will not participate in securities lending and repurchase transactions

— ​Prospectus, page 33

How’s The Performance for Phillip Singapore Real Estate Income Fund ?

The above chart is not comparative for number of reasons:

  • ​FTSE ST REIT Index does not reflect reinvestment returns
  • This fund does not reflect its subscription fee and management fee of 0.75%. In other words, this is not a net of fee returns. It does not represent what an investor would get should he or she invest at Sep-11.

There are two places where you can invest in the Phillip Singapore Real Estate Income Fund:

Eunittrust.com.sg — You can invest though their Phillip Unit Trust Platform, or through a regular savings plan. For more information, please Google the sub-headline.

​FundSuperMart.com.sg- You can also invest through Fundsupermart here.


It's good that you've made it so far, so give yourself a pat!

What we have done so far will equip you with an overall understanding of REITs.

Hence it should no stranger to you anymore and you probably have decided whether REITs are the right investing option for you.

However, never stop learning. So I set up a last chapter that contains all the necessary reading material that will propel you knowledge to the next level.

REITs Singapore

Grab all 7 Chapters, 15,322 words REITs Investing guide for free NOW.

PDF version contains all of the content and resources found in the web-based guide

Chapter #6:

Industrial REIT, Healthcare REIT, Hospitality REIT and Singapore REIT Index

Chapter #7:

REITs Resources