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Trust funds and REIT

Real estate investment trust (REIT) is a kind of trust fund. The fund is pooled from investors and managed by REIT management professionals to invest in real estate properties, e.g. shopping malls, offices, hotels, industrial spaces, and residential places. This investment instrument started in the 1960s as innovative means to allow investors to own real estate assets/properties and gain returns (ref. 3). REITS appear in Singapore in 2002 under first listing by CapitaMall Trust.

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REIT characteristics

Property asset owners tend to sell their assets to REITs to unlock the potential to generate income (when managed professionally). Another advantage is that the seller can own a portion of the REITs that generate stable income. However, there might be conflict of interest (coi) between seller and REIT if they1 are not independent.

Good REITs have ‘sponsor’ that can provide pipeline of cashcow properties over time. Sponsors can be property developers, banks, and financial institutes. E.g. Developer can spin-off their assets as REIT.

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Type of REITS in SGX

  • Commercial
  • Retail
  • Industrial
  • Hospitality
  • Healthcare

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REIT function

  • Managed professionally and charges service fee to stakeholders. Fees are charged by REIT management, property management, trustees (owns assets on-behalf of unit holders) and other expenses (e.g. interest and taxation). Info is available in REIT prospectus and financial statement.
  • Invest in real estate properties and distribute revenues (derived from rental income) at regular intervals to stakeholders.
  • Goals are to generate short term stable income and long-term asset appreciation.

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REIT investment expectations

  • Risk, due to geopolitical exposure of foreign assets
  • No guaranteed recurring income (as some REIT aims for long-term asset appreciation gain), so check the dividend policy, fees and charges.
  • REIT trumps at diversified investment, affordability, liquidity, tax benefits, and transparent/flexible trading (ref. 1)

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Unit holder rights

  • Vote at General Meeting to appoint REIT manager
  • Accorded service in accordance with the provisions of the trust deed.
  • REIT management is regulated by Monetary Authority of Singapore (MAS)

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Glossary

  • Prospectus
  • REIT manager
  • Property manager appointed by REIT manager
  • Sponsor
  • Pipeline of REIT assets
  • REIT investment approach
  • Difference between REIT (vs Property stock): biz focus on income-generating properties (vs property, but tendency to diversify from property), custody of property by independent trustee (vs by the company), dividend policy is to pay 90% taxable income p.a. to enjoy tax benefit (vs decided by board), investment/leverage guideline according to Appendix 6 CIS (vs none), tax exempted income (vs none), and management fee chargeable (vs none).
  • Appendix 6 of code on collective investment schemes (CIS).
  • REIT risks. Market risk (due to investors sentiment), income risk (due to income-minus-expenses, e.g. fees, debts, taxes), concentration risk (if investment involves just few mega properties), liquidity risk (affected by market risk), leverage risk (if REIT is debt-based and when REIT folds/wind-up), refinance risk (if REIT is debt/mortgage-based), other risks (esp. if REIT involves international assets)
  • Contractual lock-ins rental rates
  • Tenancy agreement
  • Contract for difference (cfd) is a derivative product used to speculate shares, forex, commudities, and indices without taking ownership.
  • Cfd via direct market access (DMA) is via market. It is different from non-DMA broker’s cfd (ref. 2).
  • Financial structure
  • Investment instrument
  • Unit trust fund invest mainly in shares, cf. REIT. But similar to REIT, unit trust assets are managed independently by trustee.
  • Leverage (in finance) is borrowed money used to finance investment.
  • Minimum interest coverage ratio (ICR). ICR calculates borrowers ability to meet its interest payments. ICR = earnings before interest and taxes (EBIT)/(interest expenses) over time.
  • Reit association of Singapore (REITAS, https://www.reitas.sg/)
  • Earning before interest and tax (EBIT)
  • EBIT Depreciation and Amortization
  • Amortization is to spend on cost of intangible assets (e.g. capital/loan, trademark, patent, etc.). Term used mean to ‘to kill debt‘.
  • Depreciation is used on assets.

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List of REIT (in SGX)

  • Aims apac (05ru)
  • Ascendas (a17u)
  • Ascott (a68u)
  • Bhg retail (bmgu)
  • CapitaLand mall trust (c38u)
  • CromwellReit EUR (cnnu)
  • CromwellReit SGD (csfu)
  • EC world (bwcu)
  • ESR (j91u)
  • First (aw9u)
  • Ireit global (ud1u)
  • Kep-kbs reit usd (cmou)

Others are available in the following markets

  • Fwb
  • Lse
  • Asx
  • Nyse
  • Tse
  • Klse
  • Nasdaq
  • Hkex
  • Hkse
  • Set
  • Amex

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News

  • Higher leverage limit for REIT (ref. 4) in the pipeline provided that leverage is <50% and ICR >2.5. The current limit is 45%. Increasing leverage will allow S-REIT to be more competitive during asset bidding, esp against private equity fund, property company, and foreign Reits.
  • REIT is buffered by the US-China trade war (ref. 5), thus an alternatively safe choice for investors.

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Reference

  1. Understanding REITs (Moneysense GOV SG, accessed 11 Jul 2019)
  2. Differences between cfd and cfd(dma)(hardwarezone forum, accessed 11 Jul 2019)
  3. Understanding Reit structures(The Business Times, 15 Sep 2014, accessed 11 Jul 2019)
  4. MAS proposes higher leverage limit for S-Reits (Straits Times, 3 Jul 2019)
  5. What the trade war means for REIT investors (Forbes, 3 Dec 2018)

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