Chapter #6: Industrial, hotel, Cross border and others
List Of Industrial REITs
Name
Symbol
Dividend Yield
Property Yield
Debt To Assets
Price / NAV
WALE
Distribution Frequency
AIMS AMP REIT
O5RU
8.22%
6.60%
31.20%
0.9
3.5
Quarterly
Ascendas REIT
A17U
6.71%
5.90%
34.70%
1.09
6.1
Quarterly
Cache Logistics Trust
K2LU
9.42%
7.50%
38%
0.94
4.3
Quarterly
Cambridge Industrial Trust
J91U
8.68%
5.80%
37.20%
0.84
4.2
Quarterly
MapletreeInd Trust
ME8U
7.13%
7%
30%
1.15
2.7
Quarterly
MapletreeLog Trust
M44U
7.51%
6%
34.60%
0.86
4.3
Quarterly
Sabana REIT
M1GU
9.97%
5.80%
37.90%
0.68
1.5
Quarterly
Keppel DC Reit
AJBU
?
?
26.40%
1.2
8.9
Semi-Annually
SoilbuildBiz REIT
SV3U
8.39%
5.60%
36.30%
0.97
4.2
Quarterly
Average:
WALE: 3.85 (keppel DC excluded, as it’s a outliner)
Div Yield: 8.25%
Property Yield(cap. rate): 6.28%
Gearing: 34%
“Industrial REITs are REITs that hold properties which are primarily used for manufacturing or logistics activities. A typical property profile in an Industrial REIT would include factories, distribution centres and warehouses.
Properties in Industrial REITs are typically located away from the Central Business Districts and can exist as a standalone building leased out to multiple tenants, a cluster of buildings within an industrial park or even a standalone building leased out to a single tenant.
Prominent Industrial REITs in Singapore include Cambridge Industrial Trust, Mapletree Logistics Trust and Mapletree Industrial Trust.” — REITsWEEK.com
The average yield is 8% and currently there are 9 industrial REITs listed on SGX. Industrial REITs has the highest distribution yield among other sectors.
30 to 60 years land lease – Shorter land lease as compared to other REITs properties means higher depreciation expenses. Some investors believe this higher depreciation expenses is the reason why industrial reits have higher distribution yield that is caused by the decreasing denominator of NAV.
Bobby Jayaraman mentioned in his book “Industrial REITs, however, are on short 30 to 60 leases and undergo much faster land depreciation than other assets. So distribution yield actually should be seen as part income and part capital payout.”
This short lease term also means limitation on capital appreciation.
Susceptible to country economic performance – Industrial properties are known to be susceptible to economic performance and demand is largely driven by the growth of GDP. Assets are least defensive during economic recession and can suffer from prolonged recession. As most of its tenants are SMEs and hence possess higher risk of rental default during crisis.
In 03 to 04 occupancy for industrial was around 70% range whereas suburban retail malls had above 90%, I know this is not a fair comparison but just to give you a perspective.
Unable to grow through organic – Rental increase for industrial properties is very hard as its tenants tend to be SMEs and MNCs aims to save cost by shifting its middle and back office business operation to business park. And the pressure from government to release supply to suppress rental should it increase.
Beside that, assets enhancement does not work well on industrial assets either. That’s mean that the only option for growth is through acquisition.
The advantages of industrial properties includes:
Little capital expenditure requirement as their tenants do not concern much about the aesthetic of the buildings rather the rental cost and functionality.
Adaptability towards economic needs for industrial space such as space previously used for manufacturing operation can be quickly converted into a warehousing facility.
Easy to build, fast completion time and lower building cost mean REITs managers can easily acquire industrial properties should the opportunity occurred.
Additional information for Industrial REITs
SGX, 20 October 2015. Four Industrial REITs Report September Quarter Earnings
REITsweek. Industrial REITs101
List Of Hospital/HealthCare REITs
Name
Symbol
Dividend Yield
Property Yield
Debt To Assets
Price / NAV
Industry
WALE
Distribution Frequency
First REIT
AW9U
6.88%
7.80%
32.90%
1.18
hospital
10.2
Quarterly
Parkway Life REIT
C2PU
5.50%
6.20%
34.10%
1.37
hospital
9.9
Quarterly
Average:
WALE: 10.1 years
Div Yield: 6.19%
Property Yield(cap. rate): 7%
Gearing: 33.5%
“Health Care REITs are REITs that specialize in various types of health care properties such as hospitals, nursing homes, medical centres and assisted living facilities for the elderly and disabled. It is important to note that Health Care REITs are not engaged directly in the business of providing these health care services but are instead leasing the properties that they hold to tenants on a long term basis.
These tenants could be either a single master lessee of the facility or multiple tenants renting multiple units within the property.
Prominent Health Care REITs in Singapore include Parkway Life REIT and First REIT.”— REITSWeek.com
Have you seen: Mount Elizabeth Hospital, Gleneagles Hospital and Parkway East Hospital? Yes, these prominent hospitals are managed by Parkway Life REIT, and now you can own those hospital!
Healthcare REIT typically lease out its assets to a master leasee(single tenant) in a Triple Net basis: A lease agreement whereby the leasee agrees to take care of the: First Net, property taxes/stamp, second Net, building insurance and third Net, building maintenance costs. Hence it is called Triple Net.
In other words, the tenant will pay all the operating expenses of the building it operates in.
This master lease agreement can be very long such that it can up to 15years! Which gives WALE of 10 years. Rental rate comes in two form: Base rent which is indexed to inflation and pre-agreed annual increment + variable rent which is based on a fixed percentage on the master leasee’s revenue.
This rental structure limits the downside of the REIT as the base rent is indexed to inflation provides investor a minimum income base and the variable component allows the landlord to benefit from the increased revenue of the hospital – limited downside and unlimited upside, isn’t this the best of both world?
It’s said that healthcare REITs possesses the same characteristic of a bond. Because investors are guaranteed to receive a minimum rental income PROVIDED the leasee does not default its payment.
Advantages
Trending demand for Healthcare – Rapid increase in aging population, the raise of the new affluent middle class, increasing life expectancy and raising lifestyle-related diseases mean the demand for quality healthcare will be on the raise as time progress – Healthcare REIT may even qualify as a growth stock!
Recession-proof – As mentioned on the master lease agreement. This allows the REIT to have a minimum rental income coming from the base rent. Hence whether the economy goes into recession or not it has no impact to the REIT so long the master leasee does not default. The extremely long lease also allows healthcare REIT to easily ride out of prolonged recession.
BTW health care REIT also have very high distribution yield of 6%!
High barrier of entry – Hospital buildings are guided by public policy such that the amount of hospital beds and other medical facilities in a particular region is capped. And to run a hospital required former doctors and experienced hospital managers which raise the bar for new entrants. Hence all theses make it unlikely for hospital to have oversupply issue.
Disadvantages
Limited organic growth – The extremely long lease agreement does not allow for rental reversion in which the growth is limited to what it is stated in the lease agreement.
High counterparty risk – Healthcare REITs is only as safe as the financial ability of the master leasee to meet its rental obligation. Master leasee contributes a very significant portion of the REIT total gross income. Hence it can spell disaster in the unlikely event where the master leasee defaults its payment – On the bright side, the master leasee of both health care REITs are also the sponsors who hold more than 20% of the REITs, this somewhat mitigates the risk to a certain extend.
Public healthcare policy risk – Much of our inpatient bill can be paid by medisave. However, should the government changes the amount of coverage or the type of treatment to be covered by medisave in which will reduce patient spending power on private healthcare, and opt for government subsidized hospital instead.
List Of Hospitality/Hotel REITs
Name
Symbol
Dividend Yield
Property Yield
Debt To Assets
Price / NAV
Industry
WALE
Distribution Frequency
Ascott REIT
A68U
6.84%
4.90%
35.80%
0.72
hospitality
?
Semi-Annually
(I do not include stapled security like OUE Hospitality Trust)
“A REIT that holds hospitality related properties and short term accommodations such as hotels and serviced apartments are referred to collectively as Hospitality REITs. Hospitality REITs are also sometimes referred to as Hotel REITs in some investment literature. However the term may not accurately encapsulate the full breadth of properties that a hospitality REIT may be involved in such as serviced apartments and other forms of temporary lodging.”
You probably have heard Ascott hotel and seen it in the Raffles Place, but what you don’t know is that it is managed under REIT. Hospitality REIT is similar to hospital REIT in a way that both have a master leasee as a sole tenant, rental income depends on the master lease agreement that have both the base rent and the variable component. This allows REIT manager to receive constant stream of income without being affected by the high fluctuation of tourist arrival.
Hence, the quality of the master leasee is more important than the REIT itself as it determines its rental income. Investing in hospitality REIT allows investors to exposure to our tourism economy.
Key drivers to look out are tourist arrival, hotel room, Revenue per Available Room[RevPar](nation avg stats) and Incentive Travel, Conventions, and Exhibitions[MICE](Tourism Statistics).
Advantages
Master lease agreement – This limits the downside as the base rent provides the minimum rental income and allows REIT to benefit from the upside when the tourism sector boom.
Benefit from the increasing travel – Singapore as a gateway city benefits from the increasing travel of the middle class in the ASEAN countries. Both business and leisure visitors that stopover in Singapore will create demand for the hotel.
Government Initiatives for tourism growth – Singapore has transformed itself to be a tourism and business destination. RWS, Marina Bay Sands and many marquee events like YOG, Formula 1 Night Race and etc. are here to boost our tourism economy. Even better, ASEAN favourable demographic suggests they will keep proving visitors in the near future.
Easily convert into residential apartment – In the unlikely whereby oversupply is an issue, hotel can be converted easily into residential apartment.
Disadvantages
Very cyclically and volatile – Demand for hotel room is depended on the prevailing economic conditions. Dot com crisis , Sars and 08 crisis had shown to have strong impact on hotel revenue with high unoccupancy. However, on the bright side master lease agreement provides protection in the form of minimum rental during such events.
Capital expenditure – Improvements and renovations of hotel building, lobby makeovers and room refurbishments are required for the hotel to stay in the game, this is unlike like retail REITs where the upgrade are used to achieve higher rental income.
Cross border REITs refers to REITs that have oversea properties assets. Some REITs have a small portion of its portfolio consist of overseas assets. Whereas the others, like the above have their entire properties assets stipulated in foreign land.
Below are the few points to take note when you evaluate such REITs
Assets Yield Against The Country Risk-Free Rate
Do not compare cross border property yield against Singapore national average directly. As the yield from most oversea properties will be much higher than Singapore because of their higher borrowing cost and risk free rate(10 years gov bond).
So when evaluating overseas properties investors should compare it against the risk free rate of the country and decide whether is the risk-premium worth investing.
Currency Risk To Consider
Even though cross border REITs are listed in Singapore and distributions are paid in Singapore dollar, it does not mean the investors are fully protected from the currency risk. Because the amount of distribution may be lower when as SGD strengthen i.e forex loss.
REITs managers know that and typically hedge against such foreign loss.
Local supply & demand
Each market has its own supply and demand dynamics, what is seen as high defensiveness for retail property assets in Singapore does not mean they would performance the same way in other country. Similarly, the economic landscape for office assets in foreign land is very different as compared to Singapore.
FTSE ST REIT Index
FTSE ST Real Estate Investment Trusts is the index under FTSE which is also provider of Straits Times Index. The index tracks the total price of all the S-REITs under market-capitalisation weighted approach.
At the time of writing, the 5 years CAGR is 0.37% for its price only return, if you were to add in the average distribution of 5% the performance is actually quite good given that the same period for STI total returns is only 0.61%.
For more information on FTSE ST REIT Index:
FTSE ST INDEX SERIES – Page 39
FTSE ST REIT Index – Price chart
Is there ETF for S-REITs like STI ETF?
Unfortunately, as of now there is no ETF for S-REITs like what we have for STI.
Phillip Singapore Real Estate Income Fund
However, if investors are still interested in getting exposure on S-REITs then the alternative is invest in a REITs unit trust.
The advantage of investing in a fund is that investors do not have to worry about picking the wrong REIT and spending the time on research and analysis as the fund manager will be investing on your behalf.
However, do note that this unit trust is not a passive index fund like SPDR STI ETF which has investment objective of replicating the performance of STI index.
The fund is an active fund which means the fund manager exercises discretionary stock selection that they deem will produce adequate returns to investors.
Investment Objective
The Sub-Fund seeks to achieve medium to long term capital appreciation and a regular stream of income by mainly investing in REITs listed in Singapore, including warrants, bonds and convertible bonds issued by the REITs.
Investment Focus and Approach
It is the Managers’ intention to primarily invest the assets of the Sub-Fund into REITs listed in Singapore. The Managers may also invest up to a maximum amount of 10% of the Net Asset Value of the Sub-Fund into REITs listed outside Singapore.
The Sub-Fund will invest in REITs that demonstrate capital appreciation opportunities and sustainable dividend growth potential.
The Sub-Fund intends to offer regular dividends through quarterly distributions (or such other frequency as the Managers may determine from time to time).
The Managers may only use financial derivative instruments for such purposes as may be permitted under the Code, and for so long as the Phillip Singapore Real Estate Income Fund is a Qualifying CIS, for such purposes as may be permitted under the Standards of Qualifying CIS. As long as the Phillip Singapore Real Estate Income Fund is a Qualifying CIS, it will not participate in securities lending and repurchase transactions — Prospectus, page 33
How’s The Performance for Phillip Singapore Real Estate Income Fund ?
The above chart is not comparative for number of reasons:
FTSE ST REIT Index does not reflect re-investment returns
This fund does not reflect its subscription fee, and management fee of 0.75%. In other words, this is not net of fee returns – It does not represent what would an investor get should he invested at Sep-11.
There are two places where you can invest in Phillip Singapore Real Estate Income Fund:
Eunittrust.com.sg – You can invest though their phillip unit trust platform or though regular saving plan. For more information please google the subheadline.
Fundsupermart – Or you can also invest though fundsupermart over here.