Since the listing of CapitaMall Trust in July 2002, the number of REITs has really proliferated in Singapore. After a short span of a decade, there’s now almost 30 REITs listed on SGX and I am willing to bet that there’s more in the pipeline.
The huge amount of supply has been created largely to meet the desire and demand of the public “to invest in a professionally managed portfolio of real estate, through the purchase of a publicly-traded investment product.”*
But why are REITs so popular, especially with retail investors? Here’s some of the reasons I have thought of.
Appeal of landlord business
“The investment objective of REITs is to provide unit holders with dividend income, usually from rental income, and capital gains from the profitable sale of real estate assets.”*
The idea of being a landlord appeals to most Singaporeans. Conventional wisdom dictates that one has “made it” when he’s able to own a 2nd property. That’s when he can reap passive income in the form of rentals and participate in the property cycle, buying that 2nd property during a property bust and selling during a boom and repeating the cycle till he gets ridiculously rich.
In land-scarce Singapore, this train of thought has been backed up with statistics like the private property price index from 1975 to 2014. I guess it’s also probably safe to assume that 80% of the owners of multiple properties have made good money on their properties for the past few decades.
But with the government trying to curb exuberance in the residential property market by introducing the Total Debt Servicing Ratio (TDSR) of 60%, this dream is out of reach for many Singaporeans in their 30s and 40s.
But it’s ok because with REITs, investors can also take advantage of leverage. And instead of owning just one more property, he can even diversify and own multiple properties just by investing in a REIT. These investors are able to replicate the behaviour of a landlord by collecting the rentals in the form of dividends.
Flat STI Index for past 4 years
I like to use a period of 4 years here since that’s the time yours truly has been invested in the market. 🙂
And it makes for good comparison since the STI has appreciated little since mid November 2010. It was hovering at around the 3,200 mark and there’s only an increase of 100 points after 4 years. A $10,000 investment made then would have meant little capital gains, with an annualised appreciation of less than 1%. The total returns would still be less than 4% after including dividends.
If that investor had made an investment in one of the REITs that yielded 6%, assuming no capital gains or losses, he would have achieved a superior return. Not to mention that many REITs have enjoyed capital appreciation in the last 4 years. The price of First REIT (a stock that I hold), has increased from 70 cents in late 2010 to ~$1,20 today, an annualised gain of 14%.
Plenty of yield-hungry investors
Since REITs are required to distribute at least 90% of taxable income each year to enjoy tax exempt status by IRAS, the dividend yield is generally higher than most other stocks. Not to mention bonds. Most REITs offer a 3-4% spread above that of 10 Year SGS bonds.
And there’s a lot of yield-hungry investors out there.
With many more people pursuing financial independence, a straight-forward way of measuring progress and achieving this holy grail is illustrated through this equation:
Dividends > Expenses
There’s no need to practise complicated withdrawal ratios and selling off your stocks to fund the expenses when dividends would suffice.
And if one’s expenses is less than $12,000 a year, it would merely take $200,000 of investment in 6% yielding REITs to achieve financial independence. Instead of a much harder $400,000 in an STI ETF that yields 3%.
And in case you’re wondering, I am actually pretty skeptical of using REITs as a primary tool in my investments at this point in time. What’s popular in the financial markets is generally more risky. This also probably explains why I use “infatuation” in the title instead of a more neutral word like “allure”. 😛