Introduction to Singapore REITS

By Poh Yung Shun, Sean

29 August 2005

Introduction
Since the first REIT (Real Estate Investment Trust), CapitaMall Trust by CapitaLand,
was launched in Singapore on July 17th 2002, the Singapore REIT market has since
developed rapidly to become the most established in Asia. Total market capitalization
now exceeds S$15 billion and expects to grow further by another S$1.8 billion with more
listed REITs entering the market in the within the next twelve months.

REITs are investment vehicles instituted for the purpose of creating income. REITs
invest in, develop, and manage income-inducing real estate like offices, hotels,
apartments or malls, often also dealing with the financing of real estate. All Singapore
REITs are listed and are bought and sold like other securities listed on SGX at market
driven prices. The revenue generated from rental payments under the properties is
distributed to unit holders either annually or semi-annually. REIT companies are hence
effectively what have become known as ‘pass-through entities’, passing on profits to
investors.

Types of REITs
In the global REITs market, there are generally three types of REITs. They are Equity
REITs, Mortgage REITs, and Hybrid REITs. Equity REITs invest in and own
properties and most of their income is derived from the rent of their properties. Mortgage
REITs are mortgage backed securities. They also loan money to real estate owners
thereby receiving income from interests earned on the mortgage loans. Hybrid REITs is a
combination of both the investment strategies of the above two REITs. Currently,
Singapore REITs are all Equity REITs.

Benefits of REITs
Judging by the oversubscriptions of the REIT IPOs in Singapore, it can be seen that
REITs have been well-accepted and attractive among the investors ever since the launch
of the first REIT to the most recent sixth REIT (MapleTree Logistics Trust) listed on July
28th 2005. The benefits of REITs that have attracted so many investors are listed below.

• REITs offer investors exposure to professionally managed real estate with a small
capital outlay.

• Relatively low volatility in unit price.

• Highly liquid as compared to owning actual real estate property itself as they are
publicly traded therefore investors also have the potential for capital gains when
the share price of a REIT rises.

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 • REITs are required to distribute at least 90% of net income to unit holders thus
gives it an advantage over company stocks as companies may choose not to
distribute dividends.

• There is a low correlation between REITs and conventional asset classes thus
providing diversification away from stocks and bonds within an investment
portfolio. This contrary behavior is caused by the simple fact that real estate
earnings don't behave like corporate earnings. Earnings from buildings are
generated from long-term leases providing stable returns, while corporate
earnings vary monthly, based on sales.

• REITs have provided higher returns as compared to bank deposit rates and even
some equity.

• Performance of REITs is monitored on a regular basis by independent directors,

analysts, auditors and the media. This scrutiny provides an investor a measure of
protection.

• Most categories of investors enjoy tax exemption on distributed income (the

individuals) or exemption from tax at source (Singapore incorporated and tax-
resident companies), with the exception of foreign non-individuals, who are
subject to a reduced 10% withholding tax.

• Investors are allowed to use CPF funds to invest in REITs.

With a list of advantages as listed above, it is difficult to see why investors would not be
attracted in investing in REITs and reap the benefits. The recent hype over the REITs
market has created a great awareness over this attractive financial instrument. Many
investors out there may think that this is a great investment even to the extent that this is a
sure-win investment. However, despite these advantages, REITs nonetheless entail
certain risks.

Inherent Risks of REITs

Investors should not take REITs for granted perceiving it as a safe investment like bonds
but rather, they must beware of the risks as well. Below are the key risks relating to
REITs.

• The most fundamental risk is that investors may lose money when they need to
sell their REIT units in times of declining unit prices, just like with other equity
securities.
• During bouts of economic slowdown, the property markets would also be
adversely affected. In a depressed property market, REITs will be hit by falling
rental income and a resulting drop in property value. Tenants may find difficulty
paying rent during economic downturns resulting in the rate of rental falling
significantly due to decreased demand. Hence the income generated from such
decreases and the dividend payouts to investors are reduced accordingly.

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 • If interest rates were to increase unexpectedly and higher than the yields offered
by REITs, people would pull their money out of REITs and go for other
investments offering better interest rates. However this risk is inherent is most
financial instruments.
• Investors should examine where the properties of the REITs are located. A high
concentration of development in one community or geographic region may leave
it vulnerable to a downturn in that area’s economy.
• Essentially, the strength of a REIT is largely dependent on the integrity and the
shrewdness of its managers. These virtues are necessary for making the best of the
inherent value of properties the REIT is in charge of. As such, bad management is
a very great risk for a REIT. Bad or constantly changing management may lead to
poor asset acquisition.
• The dilution effect from deferring of issue of new units to the future when buying
new properties. When REITs purchase new properties, they would have to issue
new units to finance their purchases. With more units, it would mean that there
will be a dilutive effect of lower yield per unit. This is a risk highlighted by
Temasek Holding CEO, Ms Ho Ching.

Investors should therefore assess and balance the benefits and risks of REITs before
diving into the REITs market.

Currently Listed REITs in Singapore

At present, there are 6 REITs listed on the Singapore Stock Exchange (SGX). A summary
as of 26th August 2005 of the 6 REITs is presented in the table below.
Table 1
Percentage
Date Nature of Listed Price as at 26 Increase in
Name of REIT Portfolio Size
Listed REIT Price Aug 2005 Price Since
Listing
17 Jul
CapitaMall Trust Retail $0.96 $2.42 152% 5 Properties
2002
Business
19 Nov Space and
Ascendas REITs $0.88 $2.20 150% 42 Properties
2002 Light
Industrial
12 Aug Assets in
Fortune REIT HK$4.75 HK$6.30 33% 5 Properties
2003 Hong Kong

CapitaCommercial 11 May
Commercial $1.00 $1.48 48% 8 Properties
Trust 2004

Retail and
9 Dec
Suntec REIT Office $1.00 $1.17 17% 2 Properties
2004
Space

MapleTree 28 Jul
Logistic $0.68 $0.97 43% 15 Properties
Logistic Trust 2005

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Understanding the REIT Structure
Before investing in any REIT, it is essential to know first of all, what the REIT structure
is like in Singapore as well as understand how it functions.

In the figure given below, investors who are normally termed as unit holders would
invest their monies into the REIT. With the capital generated from investors, the REIT
would acquire properties and distribute the income derived from rental back to the unit
holders in proportion to their investment amount. The trustee represents the interest of the
unit holders in ensuring that their investments are managed effectively. The Asset
Manager of the REIT is the one who decides what kind of properties should be acquired
and be included in the portfolio. The property manager is the one who manages all the
properties that are under the ownership of the REIT such as determining the number of
leases, the kind of tenants, rental space, and rental price.

UNIT
HOLDERS

Investment
Distributions in REIT

Management Trustee’s
Services Fees
ASSET
MANAGER
REIT TRUSTEE
Management Represents the
fees interest of the
Income unit holders
from
Property property Ownership
Management
Services
PROPERTY PROPERTY
MANAGER ASSETS
Property
Management Fees

With the knowledge of how REITs functions, it is thus important to know what kind of
properties that the REIT owns. One should consider whether there are high rates of
building occupancy which can bring stable income and distributions to the investors.
During an economic downturn in the past, have the properties been able to retain the
tenants and continue to earn rental income? The competency of the managers should not
be overlooked as well. Do the newly acquired properties really have the potential to
grow? Are the properties managed effectively, maximizing every rental space possible?
These are some of the important issues that an investor should look at in determining the
quality of the REIT prior to investing in one.

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 Gauging the Performance of REITs
REITs investors are all concerned with its performance. The indicator or value that
investors should focus on is the distribution per unit (DPU) yields. This is the figure that
investors should use to compare with yields and interest rates of other financial product.
In addition, by comparing the forecasted DPU yield with the actual, investors would be
able to determine if the REITs has performed well.

Distribution per Unit (DPU) = Distribution Income/ Number of Units in Issue

DPU Yield = DPU/ Market Price

Higher income from better operations and performance of the REITs would thus lead to a
higher DPU yield. Several factors such as acquiring yield-accretive properties, enhancing
the current assets, improving income through higher rentals, occupancies, and reducing
costs such as operating costs and management fees contribute to the growth in DPU.
Investors should note that when REITs make new acquisitions, there will be new issue of
units and as a result tend to dilute the DPU. Therefore, it is important to know if the
property that is to be acquired is a yield-accretive one which has the potential to provide
good levels of income.

DPU Performance for FY2004

Original Annualized
Actual Paid Price as at DPU Yield
Name of REIT Forecast in
(cents) 31st Dec 2004 (%)
Prospectus (cents)
CapitaMall Trust 8.14 9.48 1.76 5.39
Ascendas REITs 8.46* 9.21* 1.71 5.39
Fortune REIT HK31.54 HK34.00 HK6.30 5.40
CapitaCommercial
Trust 5.68 6.32 1.27 4.98
* Pro-rated figure to compare Year 2004.
** Figures taken from UBS Investment Bank Seminar at Capitalizing On Domestic And Cross Border REITs
seminar on 26th April 2005.
*** Suntec and MapleTree REITs are excluded because they were listed on 9th December 2004 and 28th July
2005 respectively.

Dividend Yield of Property Companies for FY2004

Price as at 31st
Name of Company Dividend Paid (cents) Dividend Yield (%)
Dec 2004
Capitaland Pte Ltd 4.8 2.13 2.25
City Developments Ltd 6 7.1 0.85

Comparing both tables above, it can be seen that the yield that investors can get from
investing in REITs are generally much higher those companies that are in the same
property industry. As a result of the attractive returns, the number of investors in the
REITs market has increased significantly. This has led to a surge in REITs share prices as
reflected in Table 1 above. As a result of price appreciation, the yields of the REITs have

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fallen to below 6% as compared to the initial yields of 7.06% and 6.50% of CapitaMall
Trust and Fortune REIT respectively when they were first listed.
REITs Environment In The Near Future
As the REITs market continues to grow, REITs will soon encounter challenges to their
growth. Yield-accretive properties in Singapore would soon be snapped up quickly and
the availability of such of properties will become limited. Due to the popularity of REITs,
reports have shown that many have become interested in setting up REITs in Singapore
as well as around Asia.

‘Investment bank UBS has predicted that Singapore could see another US$1.1 billion worth of listed
property trusts entering the market in the next six to nine months. Shopping mall-based Centrepoint and
office property-based Keppel Land REITs are expected to come to the market while shopping mall-based
Prime REIT, controlled by German insurer Ergo, has already filed a prospectus for IPO. Another REIT that
is expected to list by the end of the year is Cambridge Industrial REIT. The new S$500 million industrial
REIT will be the first in Singapore that is not affiliated with a developer. Cambridge has signed up 25 to 30
buildings.

Prime REIT - which will hold a 74% interest in Wisma Atria and a 27% stake in Ngee Ann City - is
awaiting regulatory approval to become the 7th Singapore REIT, while others planning REITs include
CapitaLand, who aim to list a REIT holding 21 China malls by end of next year (batch one), and Keppel
Land, who is expected to list an office REIT by March next year.

It was reported that Parkway Holdings is looking into a possible REIT. The group is currently accessing 2
to 3 proposals and if they succeed, they will be the first to launch a healthcare REIT in Asia. Currently they
are managing 3 hospitals in Singapore and 4 more around the region.’
– UBS Report -

‘Rival financial centre Hong Kong is set to launch its first REIT - Link - at the end of this year, while
Malaysia will see the listing of YTL and Landmark REITs. Hong Kong could also see another four REITs
listed in the coming months - Cheung Kong, Guangzhou Investment, Macquarie Industrials and Macquarie
Retail. Singapore ranks behind Australia and Japan, with a total REIT market worth US$9.5 billion as at
end June 05.’
- Article in Business Times, 25 August 2005 –

With so much potential competition arising, REITs companies would need to draw up
strategies in order to improve their growth. A strategy that the REITs have considered is
in overseas acquisition of yield accretive properties. This would provide diversification in
geographical location and market cycles. In addition, it is important to continue
enhancing their current property assets, creatively maximizing lettable space to attract
and maintain tenants thus increasing its income base.

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Conclusion
REITs have proven to have a good track record and will remain attractive with the
support from the Singapore government to make Singapore an attractive place for REITs
listing, for example the waiver of stamp duty and removal of most of the qualifying
conditions relating to tax transparency that will continue to stimulate and drive the
growth of REITs market. However, we should be mindful of the risks stated above
particularly the increasing aggressive acquisition by REITs and any potential
deterioration in the quality of management.

References

Websites
www.sgx.com.sg
www.investinreits.com/learn/faq.cfm
www.pimco.com/LeftNav/Bond+Basics/2005/Real_Estate_Real_Return_Basics.htm
www.deacons.com.hk/eng/knowledge/knowledge_153.htm
www.fortune.com/fortune/smallbusiness/articles/0,15114,361075,00.html
www.kiplinger.com/personalfinance/basics/archives/2003/01/REITs.html
www.capitamall.com/press4.asp
www.capitamall.com/annual/ar04/pg40.html
www.reitnet.com/reits101/

Documents
CB Richard Ellis Report - Challenges Ahead As Singapore’s REIT Market Expands.
Article Feature on The Edge by Christopher Tan – Investing in REITs.
CapitaCommercial Trust Annual Report 2004.
Ascendas REIT Annual Report 2005
Suntec REIT Financial Statements for period from 1 Nov 2004 to 31 March 2005.
Notes from seminar on Capitalizing On Domestic And Cross-Border Real Estate
Investment Trusts.
Business Times, 25 August 2005

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