While investors are hunting for yield, what many do not realise is that our local REITs are not strong choices to earn income, what's more many of these Singapore properties are valued at very high and optimistic rates that if something bad occurs, many of these REITs will breach MAS regulations and are unable to borrow further.
Let's use an example of Suntec REIT to explain.
Concept of Capitilisation Rates ("Cap Rate")
Cap Rate is an important concept when it comes to understanding a REIT. It is used as the discount rate to present value the expected future income received of a building to today. Roughly Building A which is valued at 4% as cap rate will be double the value of building B which is valued at 8% cap rate, even though both Buildings A and B have the same amount of rental income earned.
Hence, the higher the cap rate, the lower the value of the building. It is similar to the idea of dividend yield. If investors expect a certain company to give a high dividend yield, its share price will be pushed very low until the expected high dividend yield is achieved.
Suntec Example
Suntec owns office buildings in Singapore, Australia and UK. And from its latest report (see slide 59 and 60), the cap rate for the office buildings in the 3 countries are 3.4%, 6%, 5.5% respectively.
As to why Suntec has been able to give high dividends relative to other Singapore office REITs; besides due to leverage, the main reason is because it has bought overseas office buildings with a high yield (high cap rate). While people would point that cap rate is determined by the location of a building, it is worth noting all Suntec's office properties in the respective countries are in the heart of major cities. Location wise, all these properties are Prime real estate. What differs is the cap rate used in each country.
The other reason is that Singapore, relative to other developed countries, uses a very low risk free rate because our interest rates are suppressed. But this explains why Singapore investors should not park our money in Singapore but move it overseas because we will get better returns as Singaporeans.
Overseas SGX-listed REITs
This brings me back to the overseas SGX-listed REITs. Due to their nature of business being not in Singapore, they have to use cap rates which are much higher than what Singapore buildings use. Hence while their property seems low in value, in fact they may be yielding more rental income than their Singapore counterparts.
As REITs are required to pay at least 90% of income to gain tax benefits, in time to come, overseas REITs in the SGX will give a large amount of dividend to unitholders. Granted, in some countries like the US office space, these REITs are now in a crisis of confidence phase beacuse high cap rates used means their building are lowly valued which in turn makes these REITs highly geared; however, once the crisis has come to pass and these REITs resume giving dividends. Due to the high cap rate used by their valuers now, future dividend will be high.
A few REITs like United Hampshire US and Elite UK have continued to give dividends and they have been giving relatively higher yields to Singapore Unitholders.
I have noticed this and instead of investing in Singapore REITs, I am now buying SGX-listed overseas REITs.
As said, I will be recording the dividends, so investors will start to see via my quarterly logging, how much these overseas REIT are declaring as dividend relative to the local SG REITs.
I believe the difference in amount will be staggering. Of course, using my limited knowledge, I have chosen to pick the supposedly stronger few who will survive the overseas property crisis now.
<Vested in UnitedHampshire and PRIME US REIT>
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