How To Buy REITS in Singapore?
Which REITS in Singapore to invest with will depend on the following 4 factors:
1) Distribution Yield
REITs are attractive because 90% of the REIT’s income will be usually distributed to the REIT investors on quarterly basis or semi-annually . For financial savvy people, they will prefer to go for value investing in REITs Singapore than putting their money at their bank.
Distribution yield can be easily calculated by taking the total annual distribution per unit (DPU) divided by the price of the stock at the point in time the yield is to be calculated and multiply by 100%. For example, if DPU is $0.10 and if the current price of the REIT is $1.50, the distribution yield would be 6.67% per annum. This will be your return of investment and it can be more attractive when comparing the lower rental yield that you can possibly get from the current property market.
2) Gearing Ratio
Gearing is a measure of financial leverage of a real estate investment trust (REIT). Examples of gearing ratios are the debt-to-equity ratio (total debt / total equity) or and debt ratio (total debt / total assets). We need to find those REITS with a lower leverage. This is because REITs which are having high leverage will likely to suffer more pressure in servicing their debt whenever there are recessions or economic downturns. Singapore REITs will need to distribute at least 90% of its distributable income each year and if they cannot pay their loans, they will be ended up in deep troubles.
Under the regulations imposed by the Monetary Authority of Singapore for the Collective Investment Schemes, Singapore REITs without a credit rating from Moody’s, Standard & Poor’s or Fitch Gearing have to cap their gearing ratio to below 35%. The gearing ratio may exceed 35% and up to a maximum of 60% only if a credit rating is obtained from the above-mentioned credit rating agencies and disclosed to the public.
In short, just watch out for this gearing ratio which may be presented in the respective financial statement report of the REITs.
3) Net Asset Value Per Unit (NAVPU)
Net Asset Value Per Unit (NAVPU) can be calculated is by taking all of the current assets of the REIT, minus away its liabilities, divided by its units outstanding in the stock market. This is also an obvious indicator to first check whether the REIT itself is of a good value to you. A higher NAVPU means a higher value and lesser risk for you as a REIT investor.
If a particular REIT has a stock price which is close or even higher than its NAVPU, do not even think of buying it.
4) Type of Assets
You will need to understand that REITs can be in different types too and hence their performance can be varied based on different factors. e.g. Suntec REIT mainly covers the commercial properties and conference facilities. Its income performance will greatly depend on the demand for offices and related retail store rentals. Another example is First REIT which owns healthcare properties and facilities in indonesia and its income performance will depend on the fluctuation of their Rupiah and healthcare demand in the respective Indonesia cities. In fact, these are two of my long time favourite REITs which generate decent profits and capital appreciation.
In my personal opinions, REITs are really a good vehicle to earn extra passive income as it is hassle free and the payout is on quarterly basis. If you can understand the value of compounding, its effect will be multiplied as time passes. The only catch here is knowing how to buy REITs in Singapore to minimise your investment risk. Value investing is great!