The Complete Beginner's Guide
18 May, 2016
You are here and I know you want to make money from REITs Singapore.
You know the importance of saving for long term.
You even know how important it is to let money work for you rather than keep save...save....save.......................... to no end.
While many of your friends and colleagues hopelessly put their hard-earned money into fixed deposit or saving accounts to grow their capital at snail rate speed. You are different, because you seek ways to better use of your capital as you know the peanut-sized interest can't even cover the cost of inflation in Singapore.
So here you are, wanting to learn REITs investing as you heard of people collecting THREE figure, FOUR figure or even FIVE figure of hard CASH every month!
You WANT it and believe it MIGHT happen to you someday. But before that can EVEN happen, you need to learn the basic and fundamental of REITs.
The below are the 7 chapters(15,000 words+) I have prepared for you to quickly "level up" your knowledge in REITs investing.
Of course, if you feel compelled to thanks me for putting them all in one place -- Just click the share button below will pay off my 100+ hours' effort :)
Never heard of REITs?
Then this WILL surprise you...
Do you know that most of our shopping malls, offices and some industrial building are managed by REITs(well' get into the what are REITs later)?
Look at this:
Theses are the real estates properties that managed by Capitaland Mall Trust.
Which are managed by CapitalLand Commerical Trust.
These are managed by Keppel REITs.
Or even those expensive private hospitals like these:
Which are managed by Parkway Life REIT.
All look familiar to you?
Even if you live under a rock since the day you were born — you just CAN’T miss those buildings.
That’s how prominent REITs are in Singapore - It’s everywhere like nowhere!
In the past, only the riches are able to invest in those buildings and enjoy the steady price appreciation(think of the crazy amount of rental income they collect!) while the poor like us suffer from the inflation.
Owning the above assets are not even in the wildest dream of any average working class.
Believe it or not, it's not anymore because in 2002, the first Singapore REIT was launched in SGX — BAM!
NOW, You can own those buildings with capital as little as $200 by buying a single lot of REIT.
So let's dive in to the basic to understand what REITs are!
Singapore Real estate Investment Trusts, commonly referred to as S-REITs, are trusts that are managed by REIT managers to invest primarily in income generating real estate properties such as shopping malls, offices, hotels, industrial spaces, etc.
This trust (REIT) was first started in the U.S. during 1960; it was passed in Congress with the objective of providing an affordable means for ordinary people to invest in large scale, diversified, stable, income-producing real estate without the need for a hefty amount of capital.
REITs in return benefit from favourable tax treatment, and allow property developers to ease off their balance sheets by selling off capital-intensive property and to reinvest the cash back into their core business of developing new property.
Since the initial legislation was passed, more than 30 countries have established REIT regimes.
In Singapore, our first listed REIT is CapitaLand Commercial Trust, which was launched in July, 2002. Subsequently, the number of SGX REITs has grown rapidly; as of January 2016, we have 31 REITs listed on SGX.
How Does REITs Work?
REITs generate their revenue mainly from the rental income of their real estate properties; the bulk is then distributed periodically in the form of a cash distribution to investors. Under MAS regulation, REITs are mandated to distribute at least 90% of their net income to investors in order to enjoy a favourable tax benefit. As such, REITs are also known for their high distribution yield of 5-8%.
Singapore’s REIT regime was established to provide investors with an opportunity to gain exposure to real estate assets, with diversification of risks through a pooling arrangement. It was envisaged that REITs would provide investors with stable distributions through their passive ownership of income producing properties. In keeping with these objectives, REITs have to observe the Property Funds Appendix [“PFA”] of the Code on Collective Investment Schemes [“CIS Code”] which are designed to, amongst others, ensure that REITs derive revenue mainly from stable sources that are not subject to significant fluctuations. — Enhancements to the Regulatory Regime Governing REITs and REIT Managers
S-REITs are regulated by MAS
Singapore REITs are classified as Collective Investment Schemes (CIS) under the regulation of the Monetary Authority of Singapore.
MAS not only lays out rules and regulations for governing REITs, it periodically reviews its policy by seeking public feedback in order to best safeguard investors’ interests. The most recent consultation paper ended on 2 July 2015.
In other words, REITs in Singapore are well-regulated, so REIT is a legitimate investment option.
REITs are listed in the Singapore Stock Exchange, and are similar to stocks in that you need two accounts before you can buy or sell REITs :
You do not have to worry about the SGX CDP account; while you are applying for a brokerage trading account, the broker will also help you with the application of the CDP account. Hence, there’s no need for a physical visit of CDP office.
How About The Cost Of Investing In REITs?
There’s no extra cost for buying REITs; it is the same cost as buying stocks. That’s the usual exchange fee and brokerage fee. Of note, other than Standard Chartered Bank, all brokerages in Singapore have a minimum fee of $25 per trade.
Real Estate Investment Trust (REIT)
The actual terms for Real Estate Investment Trust is slightly different from a normal stock. For instance, in REITs, a “stockholder” is described as a “unitholder.”
A “share” in stock is described as a “unit” in REIT. The word “unit” may sound familiar to you if you have come across the term “unit trusts” from a financial planner or bank representative.
So what is this exactly?
Imagine there are many investors who collectively put their money into a fund. That fund is then managed and controlled by a manager which known as a fund manager to invest on the shareholders’ behalf.
However, isn’t there then the risk that the fund manager might run away with the money or abuse it for his or her own interest?
Hence, to safeguard investors’ interests, a trust structure is setup with a trustee that limits and dictates what can and cannot be done with the money. This information is laid out in a Trust Deed.
In other words, the fund manager does not possess full discretion over the fund. They do not even have the ability to withdraw the money; they can only use it for investing. In the case of a REIT, this would be solely for property investing.
The word “unit” simply means a share of ownership in that “trust” which holds the investment assets; this is the same as the meaning of a “share,” which is a portion of ownership in a company.
In case you’re wondering, shares are not lottery tickets (even though the price fluctuates daily)!
In summary: When we buy a unit of REITs, we’re simply buying the ownership of the fund that used its money for real estate investing.
When the value of the real estate increases, so does the net asset value of the REIT. When REIT price reflects this growth, investors are rewarded with capital gains.
When the real estate collects rental from its tenants, the REIT will have a net income that can pay out in the form of cash distribution to investors.
Stock For Dividend, REITs For Distribution
In stock, when the company pays its profit to shareholders, it is called a “dividend.” For REITs, this is called a distribution.
9 Benefits/Advantages of REITs Investing In Singapore
If you ever thought about buying a physical property and renting out for rental income for future financial independence or retirement.
Then perhaps you need to pause for a minute.
In many ways, a REIT is a much better investing option – and so much more now that I have 9 key advantages over physical real estate investing.
Without further ado, let’s jump right in:
#1 90% Distribution & Growth Potential
Yes, you got the headline correct; it’s not a typo. 90% of the collected leases that form the net income will be distributed to unit holders!
Besides that, investors also benefit from the gain of property value over time through the REITs’ price appreciation.
The scarcity of land in Singapore with the increasing population means that the support of economics is fundamental for property value to raise over time, as there’s limited supply for meeting the growing demand.
In short, investors enjoy two main benefits:
A good example is Saizen REIT which declared a special distribution right after accepting the agreement of sales of its entire property portfolio which valued at the premiere of its appraised value!
#2 Affordability for Average People
For the average working class, it is nearly impossible to have the kind of capital on hand to invest in real estate such as a shopping mall, commercial building, hospital, or any of the kind properties to which REITs can provide access.
Such is the beauty of REITs; they allow retail investors exposure to a variety of real estate properties that, under normal circumstances, would not be possible without hefty capital.
For example, all you need is $157 to invest 1 lot of a Suntec REIT, and you’ll get a tiny piece of ownership in buildings like Suntec City, Park Mall, One Raffles Quay MBFC properties and 177 Pacific's Highway.
Basically, you get invested into the entire portfolio of properties the REIT has. Isn’t that amazing?
#3 Diversification in Ways that are Otherwise Impossible
With REITs, investors can achieve diversification by having multiple properties with diversified tenants.
This diversification helps in two ways:
Property Value: Owning multiple properties means that the exposure of risk to any one particular property is reduced.Imagine that the MRT next to the apartment you owned decided to discontinue; wouldn’t the plunging price hit badly on your investment?
A REIT with a portfolio of 10 properties allows that the worst of each individual property value would only impact 10% of the REIT value.
Rental/lease Income: Similarly, the same applies to rental income as well.Just think, what would happen if a few of your tenants defaulted in their rent payments? Wouldn’t your entire rental income source be impacted?
With REITs, the damage of default by a single or a few retailers would be greatly reduced, as it may just be a very small portion of the REIT’s total net income.
#4 High Liquidity Means You Can Buy & Sell REITs Easily
Liquidity is the flexibility of being able to convert real estate assets into cash with little impact to the price; this is an element that makes the REIT a far better investment option than physical property.
REITs are like stocks in that they are traded on a stock exchange like SGX.
Because of high public interest and participation by large, institutional investors, this means that you are able to buy and sell REITs far more easily than physical real estate, which can be very illiquid, and can take many months or even years to get transacted.
Not to mention about the nuisance of paperwork and the hassle of seeking a broker or buyer/seller.
#5 REITs Investors Enjoy Zero Tax Distribution
There is ZERO tax at the individual and REIT level, which means higher net income to pay out to investors. By comparison, physical property comes with: property tax, stamp duty, etc.
#6 Price Transparency Of REITs
One question, can you tell how much your property is worth in a minute or two? I bet you can’t. Why?
Because you have to go on the internet, check with the property broker, do price research on the property of your kind, etc...
However, with REITs all you have to do is make a simple effort of hitting the REIT quote on your phone, and the price will appear on your screen.
REITs are traded on a stock exchange; the price transacted is public information. Whereas, the price transacted on physical property is private information. What appears on commercial price data for physical property is merely a reported figure rather than a transacted figure i.e less transparency.
Lastly, being listed on an exchange means REITs are required to follow SGX rules, which cover areas such as transparency, corporate governance, proper disclosure, reporting of financial information, etc.
#7 Accessibility to Experienced Real Estate Professionals
One of it is time, the other is expertise. But the question is, do you have both?
It is very likely that you do not. Wouldn’t it better if you had a team of professionals who are experienced in property acquisition and asset enhancements like building renovation to create the growth of your real estate investment?
Yes, that’s what you get by investing in REITs.
#8 Zero Leverage at the Investor Level
No one in Singapore purchases property with a full cash payment. Often, property investors borrow large amounts of capital from a bank to finance their property investment.
This leads to high leverage on the investor’s end, and puts them in a vulnerable position during a recession, where demand for space is low and the interest expense increases. Even worse, the bank may refuse to offer refinancing, which would require the investors to fork out money to pay the entire property loan. Failure to do so would result in the seizure of assets by the bank.
Investing in REITs, on the other hand, has no such worries because the investors do not have to invest with debt.
#9 Stress-Free on Refinancing Risk
When you borrow money to invest in a physical property, very often you will not be able to borrow the sum for the full period (e.g. 30 years).
Instead, you may only get an approval for a 5-year loan that you need to seek for refinancing at the end of every term. This exposes you to the refinancing risk of paying higher interest. In the case of REITs, the fund manager will manage this.
Real Estate Investment Trust
Rental yield 3 - 4%
Distribution yield 5 - 8%
Illiquid and high transaction cost
Liquid and low transaction costs
Stamp duty tax and tax on rental income
No stamp duty and tax on rental income
Need to manage tenants and property maintenance
Professionally managed by REIT manager
Own 1 - 3 properties at most
Own a portfolio of diversified properties of different market
High leverage with constant worry about refinancing
No leverage on investors level. As the REITs manager will manage the finance
Wilson Tan, CEO, CapitaLand Mall Trust Management Limted
Explaining What Is Real Estate Investment Trust In SSI
Still.......... don't understand what REITs are? No worries, I have invited the CEO of CapitaLand Mall Trust Management to explain it to you — No financial term, no technical jargon and no brain needed...
So watch it before going to the next chapter!
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