Header image

Guide to Real Estate Investment Trust (Reits) – Hows and Whys

Posted on by careyourpresent

What are Real Estate Investment Trusts (REITs)?

Real Estate Investment Trusts (REITs) are getting popular nowadays. For those who are not familiar with REITs, do read this article. For those who are familiar, this article will be a refresher and may have things that you never think of in the past.

Why and What?

In terms of capital, you can start investing in Reits from as little as $1000 as compared to real properties where you need at least 5-6 figures for the downpayment! Thus, it is a very affordable option for people who want to invest in properties for cashflow but only has limited funds.

To put in in very simple terms, in summary, REITs are

  • popular investment options for those who are interested in real estate, but do not want the hassle of managing multiple properties themselves.
  • investment vehicles that own, operate, and finance income-generating real estate properties such as apartments, hotels, office buildings, data centre, rural farms, shopping malls etc
  • investment trusts that own, operate, and finance income-generating real estate properties. In return, REITs were required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which mean cashflow for investors.

Advantages of Reits

  1. Diversification: REITs provide investors with exposure to a diversified portfolio of income-generating real estate properties unlike a single property for a real physical property that one purchase directly.
  2. Dividends: REITs generate income through rental payments and interest payments from real estate loans and they are required to pay 90%. This income is typically distributed to shareholders in the form of dividends, providing a steady cash flow.
  3. Liquidity: REITs can be easily bought and sold on stock exchanges (can even use RSP), providing investors with the ability to quickly liquidate their investments if needed. This is totally unlike a real property bought from the real estate market.

Disadvantages of Reits

  1. Volatility: Like all stocks, REITs are subject to market volatility and can experience significant price fluctuations, especially for those weaker reits. In Singapore contexts, we can see what happened to the US office reits 🙁 Conversely, real physical property prices are usually steadier.
  2. Interest Rate Risk: REITs may be impacted by changes in interest rates, which can affect the cost of financing for real estate loans. We can see this in the recent rate hikes.
  3. Potential right issues: Reits doesn’t keep much cash, hence for acquistion of new properties, repayment of debt, they may raise cash using rights issue.

Key Metrics to look out for before investing

Before investing in Reits, we should always take note of these nine metrics. Of course, these are not the full list, but one should at least know these nine metrics.

Distribution Per Unit (DPU)

Distribution per unit (DPU) is the amount of dividend paid per share. One should at least aim for 6% and above since the current risk-free treasury rate is 5%.

DPU is one of the most important metrics to evaluate when investing in REITs. It is a measure of the REIT’s ability to generate income and course the cashflow to investors. Investors should look for REITs with a history of consistent and sustainable DPU growth. If DPU keep decreasing due to Reit issue (rather than Macros situation such as COVID), investors better take note and decide if one should continue with this investment.

Growth in Distribution Per Unit

The growth in distribution per unit (DPU) is the increase in the REIT’s DPU over time. Investors should look for REITs with a consistent track record of increasing DPU. IT can be slow increase but at least must increase. One can look at the Mapletree Family of Reits such as Mapletree Logistics Trust for example.

To put in another word, a REIT that consistently grows its DPU over time indicates that it is able to generate more rental income from its properties over the years, and thus, has the potential for long-term growth. However, please take note the DPU growth should not be from the growth in debt.

Occupancy Rate

Occupancy rate measures the percentage of the REIT’s properties that are currently leased. A high occupancy rate is a positive indicator of the REIT’s ability to generate rental income from its properties. Investors should look for REITs with a consistent history of high occupancy rates, as this indicates strong demand for their properties. Typically, 90% plus will be good.

Gearing

Gearing measures the amount of debt that a REIT has relative to its equity. Too much debt can increase the risk of right issues and the potential defaults in the very worst scenerio. Investors should look for REITs with a manageable level of gearing, which should not exceed 40%.

Price-to-Book Ratio (P/B Ratio)

The price-to-book ratio (P/B Ratio) measures the market value of a REIT relative to its net asset value (NAV). A REIT trading at a discount to its NAV indicates that the REIT is trading at a discount to its properties.

However, low P/B values doesn’t mean the Reits in good. Conversely, usually good Reits trade above book value (example Parkway Reit). Investors should look for REITs with a P/B ratio by referencing to its historical average or those of its peers with similar assets.

Interest Coverage Ratio

The interest coverage ratio measures a REIT’s ability to pay its interest expense using its operating income. The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense during a given period.

A high interest coverage ratio indicates that the REIT can easily meet its interest obligations, while a low interest coverage ratio may indicate financial distress. Investors should look for REITs with a high interest coverage ratio, at least above 2.0.

Quality of Sponsors and Growth Prospects

The quality of sponsors and growth prospects are critical factors to consider when investing in REITs. The sponsors’ quality can provide investors with confidence in the REIT’s management team and its ability to generate long-term growth. Sponsors can also support potential right issues, thus price support too.

Additionally, investors should evaluate the growth prospects of the underlying properties, which can provide insight into the REIT’s potential for long-term growth. In Singapore Contacts, Capita, Ascendas, Maples and some frasers families of Reits will be great!

Rental Reversion

REITs signed agreement with Tenents for a certain agreed period. Leases will be renewed every few years. When they are a change in rental rates, this is called Rental Reversion.

Positive rental reversion means that REITs managed to get a higher rental rate from its tenants. If the rents drop, it is called negative rental reversion.

Investors should always look for REITs with positive Rental Reversion. This signal that this REITS have the bargain powering in the industries and also reflected the importance of its location and other features of the buildings. This indicates competitive advantages.

Lease Expiry Profile and Weighted Average Lease Expiry (WALE)

The lease expiry profile and the weighted average lease expiry (WALE) are metrics that provide insight into the stability and visibility of the REIT’s rental income stream. The lease expiry profile measures the percentage of the REIT’s leases that will expire in the next few years, while the WALE measures the average remaining lease term of the REIT’s portfolio.

Investors should look for REITs with a stable lease expiry profile and a long WALE. A stable lease expiry profile indicates that the REIT’s rental income stream is secure and that it has sufficient time to renew leases and find new tenants. A long WALE indicates that the REIT has a stable and predictable rental income stream, which can provide investors with a sense of comfort that the REIT’s earnings are predictable.

Good articles that you should read!

People are drawn to dividend investing.

Why? Firstly, dividends provide a regular stream of income, allowing investors to receive a portion of the company’s profits on a periodic basis. This can be particularly attractive for individuals seeking consistent cash flow or looking to supplement their existing income. Additionally, dividend investing is often viewed as a more stable and predictable investment strategy compared to relying solely on capital appreciation.

I always write and share articles, especially on dividends which many people love them. Do read them!

Alternatively, you can go the right side of my page, there is a search bar where you can simply search “dividend” to see all my articles related to dividends!

Of course, you can search for other things that would interest you such as “Careyourpresent”, “Reits”, “Side Hustles”, “Fixed Incomes”, “Savings” etc.

CAREYOURPRESENT

Money just buy you the chance of freedom.

When you are young and working, you exchange time for money. When you are old, you can have lots of money but you can’t buy time back, especially the things that you have missed while busying striking out in career. Of course, if you love your career, and consciously know that you are missing out the first time your child walk or talk, that’s ok, but if you are the other spectrum, please do something about it.

Your kids grew up and they no longer need you to accompany them. They no longer want to sit on your lap to share/do things with you…all these time you spent in your 9 to 6 or even longer cubicles…can the money that you have earned by you back these?

We always thought we have more time with our old parents, but we are wrong. Time with them is ticking away every day. One day it will suddenly be gone. There is no regret medicine, no reset in time. Gone is gone and cannot come back. No matter you are billionaires or millionaires, you cannot reset this.

We always thought that we have more time with our spouse every day, but we are wrong. One day they will be gone too. When you read this, please go tell your spouse that you love him/her and he or she is the best thing that you ever had in your life.

I have picked out some of the more life reflecting articles of the CAREYOURPRESENT series. Do read them:

You can read more about my articles on Careyourpresent via the Category “Careyourpresent” or simply click “Careyourpresent” via the main menu bar.

REMEMBER:

Love your life daily.

You have one less day with your spouse, parents, children and yourself.

Time is ticking away.

For each passing day,

Enjoy and Treasure your Life!

For those who are interested in regular updates of my articles, please join the others to sign up for my free newsletter to has my newest blogposts sent to your mailbox for free!

For real time exclusive updates on market news/life (especially Crypto markets where the news move fast, important news will be shared directly via tweets or telegrams), do also join the platforms below and engage with other like-minded people!

You may also contact me via [email protected].

If you’re looking referral codes, do check out my referral and ebook page. Give it a try and who knows? You might end up loving these platforms! To be absolutely fair to all the readers, I am definitely using all these companies and they are useful to me! Likely will be useful to you too!

At the same referral and ebook page, you can also download my free ebooks and other free resources.

For quick references to these resources, you can see below.

  • Ebooks and other useful resources on enhancing productivity (Investment, Excel, Notion etc). Currently most of it are free at this moment (subject to change).
  • WeBull: A powerful brokerage with nice free welcome gift. You can refer to my guide here on how to signup! 4 Simple step only! Click here to register a new account!
  • MoneyOwl: You can use this 6SHU-93MC to get free grab vouchers and highly safe liquid cash fund account.
  • Trust Bank – You will enjoy free FairPrice E-Voucher referral if you sign up via my referral code KNDBPEPT. Simply download the Trust Bank SG App on the App Store or Google Play Store. Tap on “Use referral code” immediately after you start the app and key in: KNDBPEPT
  • FSMOne: P0413007. Good account to keep liquid cash in autosweep and to purchase investment at low fee.
  • Hostinger: You can use this link for hosting your new website. 20% off hosting!
  • Crypto.com: Use my referral link https://crypto.com/app/h92xdfarkq to sign up for Crypto.com and we both get $25 USD 🙂
Category: Investment and Finance

Leave a Reply

Your email address will not be published. Required fields are marked *

%d bloggers like this: