9.3.12

REITs: Both Pros & Cons

Recent newspaper articles have increasingly laid blame on real estate investment trusts (REITs) for the rising occupancy costs in retail and industrial properties. Here is an article i plucked out from todayonline.com about Reits so that people may gain more understanding about it.

REITs, in their relentless pursuit of superior shareholder returns, have generally been very proactive and efficient in raising the rental rates of their investment properties. This is in the best interests of REIT shareholders; unfortunately, it also results in higher rental costs, which eventually filter through to the inflation basket.
However, while potentially resulting in higher inflation, REITs also have their benefits.

First, the introduction of REITs has provided a cost-effective way for investors, especially the retail investors, to gain exposure in a pool of diversified commercial or industrial properties. Before REITs were introduced, ordinary investors were largely shut out of commercial and industrial real estate due to the generally large amount of capital involved. REITs have helped to attract retail money into these previously inaccessible property sectors, thus expanding the investment options of ordinary Singaporeans.

This, in turn, has boosted the supply of commercial and industrial properties in Singapore. Even if REITs mainly purchase existing buildings from property developers, they effectively free up capital in the property developers, who then gain the incentive to build new commercial and industrial buildings. In fact, many property developers who are large REIT sponsors in Singapore, have been recycling the capital they generate from the sales of their investment properties to their sponsored REITs to build new retail properties. This helps to create a more vibrant retail mall scene in Singapore. One might even say REITs have helped to boost Singapore's profile as a tourist and commercial hub.

Second, REITs also help to improve the quality of existing commercial and industrial buildings. Due to their focus on shareholder returns, REITs are normally very active in enhancing the premises, facilities and services of their investment properties whenever the opportunity arises. This has resulted in better quality investment properties (especially the retail malls) that are more exciting to visit. For example, many retail malls (such as Plaza Singapura and IMM Building) have been successfully refurbished and enhanced by their REIT owners.

Last but not least, the Singapore REIT sector was created to provide an additional high-yielding financial instrument for Singaporeans to invest their savings in order to secure a steady income upon retirement. This is especially important given Singapore's ageing society. The sector has developed well over the past decade with more than 20 REITs being listed currently, offering investment opportunities into different investment property asset classes. In fact, the Singapore REIT sector is currently the second-largest in Asia, just behind Japan, another ageing society.

Thus, like in most situations, the case for or against REITs is not a straightforward one as it entails both social and financial benefits and costs. I guess the key question is whether Singapore as a society values the social and financial benefits of REITs more than its costs.

by Tan Chin Keong
Analyst at UBS Wealth Management Research.

In my opinion, Overseas markets have been doing very well with the inception of REITs and has been there since 10+ years ago. Singapore is new to this field and a few teaks here and there will balance out everything. Nonetheless, i believe that one should still take advantage of the high dividend yield REITs are providing (it's so much better than putting your money into bank savings account where your money is eroding each day!)

2 comments:

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