Investing in properties has been hugely rewarding for many Singaporeans. Because of land scarcity and Singapore’s strong economy, property prices in Singapore have appreciated handsomely in the last four decades.
But buying properties directly is not the only way you can invest in properties. Real estate investment trusts, or REITs, are a great vehicle to invest in properties too.
REITs are investment trusts traded in the stock market like any other stock. What REITs typically do is to pool investors’ money to invest in properties. Investors in a REIT can earn from (1) an appreciation in price from the properties that the REIT holds, and (2) distributions that come from the rental income produced by the REIT’s properties.
Not all properties are the same
Not all properties are made equal. Some appreciate faster or produce better rental yields. As such, knowing which property to invest in is crucial for any property investor. There are three key aspects of a property you should look at when you’re making a property investment decision.
What’s interesting is that, these three key aspects can also be applied to investing in REITs. With this in mind, I would like to share what these aspects are.
First key aspect: Compare prices
Never pay more than what a property is worth. That is the most fundamental aspect of property investing. One easy way to estimate a property’s value is to compare the price of the property against similar properties in the area. This is not a completely accurate way of valuing a property (individual properties can be different and thus valued differently) but it can still produce a useful ballpark figure.
In a similar vein, comparing the prices of similar REITs can also yield useful insight. The twist here is that instead of comparing just prices alone, investors can look at the price-to-book (PB) ratio.
The PB ratio is calculated by dividing a REIT’s market capitalisation (stock price multiplied by number of shares outstanding) by net book value (total assets minus total liabilities). By comparing the PB ratios of similar REITs – such as say, REITs that own predominantly office buildings in Singapore – it is a good first step in helping us find relative bargains.
Second key aspect: Look for catalysts
Catalysts are events or announcements that can lead to the price of a property appreciating rapidly. For example, this can be a developer eyeing a prime piece of land, or the building of a new school or train station nearby. Such developments can rapidly increase the value of a piece of land, and hence any property that’s sitting atop.
When it comes to REITs, catalysts are also important. As investors that consume publicly-available information, it’s not easy to know for sure what a REIT’s future plans are. But, if a REIT has a sponsor with a strong pipeline of properties that can be injected into the REIT in the future, then there are potential catalysts for growth.
Another catalyst for a REIT would be asset enhancement initiatives, which is commonly abbreviated as AEIs. An AEI is essentially a project to upgrade an existing property. If done well, an AEI, when completed, can allow a property to command higher rent.
Third key aspect: Be aware of new regulations
A few years ago, Singapore introduced new regulations to control the property market. These measures were subsequently known as property cooling measures. What the regulations essentially did were to (1) make investing in a property in Singapore not as easily accessible to foreigners, and (2) impose a hefty price for “flipping properties.”
The regulations ended up having the desired effect of cooling property prices and ensuring that we did not reach bubbly territory. Property investors should be aware of any changes to property regulations. As history has shown, changes in regulations could have impacts on property investors’ returns.
This is applicable to investing in REITs too. In general, REITs are under more restrictions compared to most other companies. For instance, a REIT is (1) required to pay 90% of its taxable income as distributions each year, and (2) required to keep its gearing ratio below 45%. The gearing ratio essentially measures how much financial risk a REIT is taking on, and is calculated by dividing a REIT’s total debt by its total assets.
In 2015, the Monetary Authority of Singapore made some changes to regulations that govern REITs. Any future changes could make REITs more or less attractive as an investment vehicle.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.