REIT Investment Expectations & Risks

Run the other way if anyone tells you these:

  • REITs prices will ALWAYS go up!
  • REITs will ALWAYS pay cash distribution without fail
  • REITs are as safe as putting money in the fixed deposit
  • You will NEVER lose money on REIT investment!

Alright they may not say the exact words, however, if they are making statement that makes you FEEL or THINK towards any of the above — RUN!

Let's face it, talking about risks is boring, you would rather spend your day lying on sofa, day dream about the pile of cash you would put in your pocket once you are a REITs investor...

You deserve a pat on your shoulder for that. Because thanks to you for doing a favor to let the other rationale investors to make money off your stupidity:)

​So, now what? Keep reading, skipping this chapter will do you more harm than good.


Investing in REITs is like investing in stocks. Do not assume that REIT prices will increase or distribution pay-out will always be constant. At a time of crisis, REITs may cut distribution pay-out, and prices can drop below the investor’s original purchased price.

REIT Investment Expectations

REIT Investment Expectations

REITs are a slow-growing asset class, as their main objective is to provide a stable stream of constant income to investors on the rent collected. Because of this, REIT prices are generally less volatile than that of stocks; there may be growth, but it’s often slow and steady.

REITs investors should not expect the price of REITs to grow as much as stocks; rather, investors can expect to receive a steady cash flow from the REITs in which he or she has invested. REIT investing is for the long-term rather than the short-term.

It’s important to note that REITs are mandated to distribute at least 90% of their net income, which means only 10% is retained in their cash reserve. This makes it hard if not impossible for REITs to use their reserve for debt redemption, assets enhancement, or acquisition for growth without raising additional capital.

​The average distribution yield for REITs is roughly 5-6% per year.

Distribution frequency is usually semi-annually or quarterly.

​REITs will usually raise capital from existing investors and/or outside investors from time to time for asset enhancement, debt redemption, or acquisition. Investors should prepare for this and not spend the distribution collected. This allows the investor to participate in the growth at the time of a cash call.

REITs Cash Call

REIT Investment Cash Call

​According to a Business Times article by Teh Hooi Ling (“The REIT Myth Busted”), most REITs, whenever they pay out a distribution, will take back all in the form of rights issue.

Investors have to understand that this is simply the nature of REITs because of their little retained earnings, even though on a cash flow basis there is more outflow (cash call) than inflow (distribution). This does not mean that investors would not gain from REITs investing as investors returns are measured by total returns of the security and not distribution yield.

​REITs may use the capital for asset acquisition or enhancement to generate more returns in the future. In fact, over the past 10 years, REITs have been shown to achieve rather spectacular total returns(Distribution & Capital) despite whether investors participate in a cash call or not(performance chart shown in the same article).

​So remember, REITs investing is for the long-term gain, not the short-term (NOT even short-term distribution gains).

Published November 30, 2011


CMT returns almost 130% since its IPO

WE refer to the commentary, 'The Reit Myth Busted', by Ms Teh Hooi Ling (BT, Nov 26).

Similar to other stocks listed on the Singapore Exchange, the performance of Reits should be analysed based on the total returns they give to shareholders. CapitaMall Trust (CMT) has delivered sustainable and resilient returns in the form of both regular distributions as well as long-term capital appreciation since its IPO. Over the last nine years, CMT has delivered a total return of close to 130 per cent....

Read More​ >>

5 Risks To Consider On REIT Investment!

Not every REIT is the same; the risks that each REIT faces are different depending on the sector, geolocation, tenancy agreement, investment objective and strategy, etc.

Although each REIT has its own unique set of risks, below are the common risks that most REIT investors face:

#1 Market Risk That Can Make Your Stomach Churn!

REITs are listed on an exchange; that’s to say the price movement of REITs generally reflects investors’ expectations about the REIT’s performance, property market, and general economic performance in the future.

Therefore, do not assume that prices are always stable and will always be trending upwards. Prices may fall below your original purchase price.

One way to look at REITs is to treat them as a property investment, with a long-term investment view, and ignoring the daily volatility of the price. The price may not reflect the fundamentals over the short term, but will generally revert back to its fundamentals over the long-term. Hence, investors must have the stomach to tolerate short-term price fluctuation.

#2 Concentration Risks That Can Wipe Out Your Distribution Income!

Not all REITs have a diversified portfolio of properties. For example, SPH REIT only has two properties in its portfolio: Paragon and Clementi Mall.

A concentrated portfolio means a higher reward when the few assets are doing well; however, the converse is true when a few assets are underperforming.

Think of it as two eggs in a basket. One falls off. Isn’t that a 50% loss as compared to say 10 eggs in a basket, where one egg only represents 10% of the basket’s value?

Yes, you get that.

​Diversified tenants are equally important, as that is the income source. Relying on a few anchor tenants may cause a REIT manager to lose his or her negotiation power when it comes to rental reversion.

#3 Income Risk - NO 100% Guarantee REITs Will Always Make Money!

Even though REITs are mandated to pay out 90% of their net income to unit holders as a distribution, this is only provided that the REIT’s net income is positive.

Even though rental incomes are often stable, investors still need to be aware that during a recession, tenants may default payment and their distribution may get reduced.

Cash distributions are not always constant; they depend on the rental income that the underlying properties are producing. The reversed rental rate can be lower, and occupancy can drop at times of recession. All of these factors can result in lower net income and in return lower distribution per unit.

#4 Liquidity Risk - Just because it’s Liquid Does Not Mean it Will Always Be

Liquidity refers to the amount of unit volume that allows investors to buy or sell without affecting much of the current unit price. REITs in Singapore are generally liquid due to the public interest and demand for a high yielding instrument.

Be cautioned, however, that during a market downturn, market sentiment can be bad that trading volume becomes thin. Investors who desperate for exit would have to settle for lower prices in order to liquidate their position.

#5 Refinancing Risks Will Always Be a Challenge

It is unlikely to find any REIT that has no debt, or intends to redeem its debt in full.

REITs will always have debt, and will prefer to extend their debt because of their small amount of retained earnings. Hence, the risk of incurring a higher cost of debt caused by the refinanced loan will always be an ongoing challenge to the REIT fund manager.

Should the banks perceive the REIT as having a low creditworthiness, they might even choose not to approve the loan. REITs might then have to resort to raising capital through other means, such as equity for debt repayment.

Are you done? Great!

Let's move to the next chapter.

REITs Singapore

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