By Rusmin Ang
When I was eight years old, I remember seeing my grandma taking out her savings from a container tin she hid under her bed whenever she needed the money. Today, that image can only be seen on TV shows as most of us now keep our savings in a bank.
The bank pays an interest for every dollar we deposit but we know the rate is outrageously low in Singapore; less than a percentage per annum! You might consider depositing your money in foreign countries to earn a higher interest rate; Malaysia and Australia offer interest rates around 3%. However, you will need to think twice when you take currency exchange into account. From 1988 to 2015, the Malaysia ringgit and Australian dollar have depreciated by approximately 55% and 28% against the Singapore dollar respectively! That leaves us little choice but to keep our money with a local bank and you’re back to square one and pathetically low interest rates.
If you are still searching for a safe place to park your money and still earn a steady, higher return, then Singapore Real Estate Investment Trusts (S-REITs) may be just what you’re looking for.
[We’ve created a free resource for you to refer to about all the REITs in Singapore – Latest S-REIT Data]
But why S-REITs? Let me share with you 5 distinctive benefits:
#1 Singapore is Safe & Stable
We all know how expensive property can be in Singapore. In an island state with limited means to expand, property prices here will only continue to go higher and higher in the long run – and investing in REITs is a great way to invest in property.
But beyond the fact that Singapore is so land scarce, the only reason why property prices keep rising is because Singapore is particularly safe and stable place to live in. Because of this, business and investors dare to invest in the country driving economic growth, prosperity and rising property prices.
#2 Tax Free
Singapore REITs are able to offer exceptionally high yields due to incentives given by the government. REITs are exempted from the normal 17% corporate tax rate if it distributes 90% of its distributable income to investors as dividends. Because of this, REITs earn a higher income and can afford to pay out higher yields. And another piece of good news — the recent 2015 Singapore budget has approved and granted a tax-break extension for REITs for another five years!
#3 Well Diversified
If you own a physical property, your risk is concentrated in one area. If the property you own is somehow inexplicably swallowed up by the ground, your entire asset is gone (exaggerated example I know, but you get the point).
On the other hand, a REIT owns various types of real estate assets ranging from malls, offices, industrial parks, hotels, and hospitals that are located in multiple locations and countries. Therefore, your risk is well-diversified.
For instance, if you like the idea of owning a shopping mall in Singapore, then you can consider Frasers Centrepoint Trust that owns malls like Centrepoint, Causeway Point, Changi City Point and more which are all diversified island wide.
Since its listing in 2007, Frasers Centrepoint Trust has netted cumulative dividends of around 68% — and that’s excluding capital gains! If you invested $10,000 during its IPO, you’d have already collected $6,800 in dividends alone while still being entitled to more future streams of dividends. In another four years, you can expect your initial investment to break even, which means your unrealized capital gain and future dividends is all pure profit!
Estimated annual dividend yield of Frasers Centrepoint Trust based on 2007 cost
The Monetary Authority of Singapore (MAS) under the Collective Investment Scheme Regime of Securities and Future Act governs Singapore REITs. MAS regulations state that a REIT’s total borrowings cannot exceed 35% of its total assets and they can only borrow up to 60% only with a credit rating from one of the three largest rating agencies (this regulation will change to a flat 45% from Jan 2016 onwards).
On top of that, REITs are not allowed to spend more than 10% of its total asset value on new developments (this regulation will change to a 25% from Jan 2016 onwards). So the risk of a REIT defaulting on its debt is low and managed from a regulatory level.
At the same time, it is not wise to assume that all REITs in Singapore are safe to invest in. Despite being well-regulated, there are cases where a REIT manager can mismanage a REIT and lead it into financial trouble.
#5 High Yield
Singapore REITs averaged a 6% yield in 2014. Some REITs even have yields as high as 8% (this doesn’t mean you should pick a REIT just because it has a very high yield. You need a proper investment process to select the best REITs in Singapore). For such a safe and stable investment that pays dividends four times a year, the yield from REITs are far higher compared to other stable investments like bonds and fixed deposits. Furthermore, REITs also give you the potential for capital growth increasing your overall gains even more.
If you’re an income investor interested in adding REITs to your portfolio, remember to check out our S-REIT data section for information on distribution yield of all Singapore REITs and more.