Investing in S-REITs: A Comprehensive Guide

Hi, I'm Jason, and welcome to Syfe Investing  Simplified! Lately, S-REITs have been gaining   a lot of attention, and today we're going to  explore this exciting asset class. We'll guide   you through the key concepts and strategies for  investing in S-REITs. These are the topics I'll  

cover in this video: What are S-REITs  Why invest in S-REITs With an spotlight   comparison of S-REITs vs Physical properties When is a good time to invest in S-REITs? 

How to invest in S-REITs So What exactly are S-REITs?  Many of you are likely familiar with real  estate here in Singapore, but perhaps less   so with Real Estate Investment Trusts, or  REITs. Let me give you a quick overview. 

Think of a REIT as a mutual fund. A REIT  manages pools of money from investors. But   instead of investing in stocks or bonds, a  REIT primarily invests in income-generating   real estate. This can include a variety of  commercial properties, such as office buildings,  

shopping malls, warehouses, hospitals, and even  data centers. Investing in REITs is like owning   a small piece of these properties without  having to buy the whole thing yourself!  REITs listed in Singapore are referred  to as S-REITs. As of August 2024,  

there are 40 S-REITs listed on the SGX, with  a total market capitalization of around S$100   billion. This makes SGX one of Asia’s  largest REITs & Property trust markets.  Why Invest in S-REITs? Before we look at the above,  

let's take a quick step back and ask, Why should you, as an investor, be interested   in real estate—whether through physical properties  or REITs? And It boils down to two main reasons:  Capital Appreciation: You want the value  of your investment to grow over time. 

Rental Income: You want a steady stream of  income from tenants renting the property.  As a REIT investor, you own units in the trust.  The Net Asset Value (NAV) of each unit increases   as the value of the underlying properties  appreciates. Plus, you receive a share of  

the rental income generated by those properties. In Singapore, S-REITs are required to distribute   at least 90% of their taxable  income to investors, which is   why S-REITs offer attractive distribution yields. A bluechip S-REIT typically offers a yield of 5-6%  

per annum, with some providing even higher yields. S-REITs vs. Physical Property:   What’s the Difference? One common question we get is:   What are the differences between investing  in physical properties and REITs? Compared to  

owning a physical property yourself,  S-REITs have several advantages.  Tax Efficiency One major advantage   of S-REITs many investors may not be aware of  is their tax-efficient structure, thanks to the  

tax transparency framework provided by IRAS. Unlike regular companies, S-REITs are exempt   from corporate tax if they distribute at  least 90% of their taxable income annually.  Additionally, individual investors  don’t have to pay dividend tax or  

income tax on these distributions. On the other hand, rental income   from physical properties is subject to income  tax. The tax efficient structure makes S-REITs   a very attractive option for building  your passive income over the long term. 

Also, there are other advantages of S-REITs: S-REITs have a low capital requirement. With   a minimum investment of 100 shares on the SGX,   you can start investing in S-REITs with a few  hundred Singapore dollars. On the other hand,  

buying into physical properties requires  high capital outlay in Singapore,   often a few hundred thousand dollars. S-REITs are also highly liquid. Because   they're listed on the SGX, you can  trade them with ease, just like stocks. 

In addition, S-REITs provide diversification by  investing in multiple properties, often across   different countries, and you can diversify  further by holding several REITs.  Lastly, S-REITs are professionally managed,  so you don’t need to worry about tenancy,  

leasing, or financing, unlike the hands-on  work required in managing physical property.  Of course, there are advantages to  owning physical properties, for example  You have more control over the property, although  that also comes with high maintenance / management  

fees and can be quite time consuming And you can use leverage through   mortgages to potentially boost returns. For many investors, especially those   starting out, S-REITs offer a less  risky and more accessible way to tap  

into the real estate market in Singapore. When is a good time to invest in S-REITs?  To answer this question, let’s take a look  at the key drivers for S-REIT performance. At the broad asset class level,  

two key macroeconomic drivers are:  Economic growth and Interest rates  Let's talk about economic growth first. A  strong economy usually means higher demand   for commercial real estate. This can boost  rental income and property values for REITs,  

which is good news for investors as it  can lead to higher dividends and capital   appreciation. On the flip side, a weaker economy  can have a negative impact on REIT performance.  Moving on to the next key driver of REIT  performance: interest rates. REITs are sensitive  

to interest rate changes for a three key reasons: Borrowing Costs:S-REITs often use debt to finance   their operations. When interest rates are  lower, their borrowing costs decrease,   which can lead to improved profitability. Investor Sentiment: Lower interest rates  

can make cash instruments like T-bills  and fixed deposits less appealing due to   lower yields. This can cause investors to  shift their money into REITs, increasing   demand and potentially driving up prices. Property Valuation: Interest rates play a role in  

how properties are valued. Lower rates generally  lead to higher valuations for the underlying   properties, which can benefit the REITs holders. In a nutshell, lower interest rates tend to be   more favorable for REITs, while the inverse  can potentially hinder their performance. 

So, is now the time to buy S-REITs? Many  of you may be asking that. In July 2024,   Syfe held a S-REIT mid-year outlook with  SGX and Lion Global Investors (you can find   the link in the description). But to quickly  recap why Syfe is optimistic about the sector:

Stable Economic Growth outlook: The global  economy is projected to grow at a steady 3.2%   in 2024 and 3.3% in 2025, according to the  IMF. Singapore also shows stable growth. The   median forecast from 21 economists surveyed  by the Monetary Authority of Singapore (MAS)  

in September indicates that the economy is  expected to grow by 2.6% in 2024, and 2.5%   for 2025. This stable economic environment  creates a conducive environment for S-REITs. Favorable Interest Rate Outlook: The Fed  initiated a 50 basis points (0.5%) interest  

rate cut in September, signaling the  start of a rate-cutting cycle. This   will remove the key headwind faced by the  S-REIT sector for the past three years. Attractive Valuations: Despite the recent  rebound, S-REIT valuations remain compelling.  

They are currently trading at an average of  0.95x price-to-book, which is lower than the   historical average of 1.0x and significantly  lower than the 1.2X to 1.4x seen before the   COVID-19 pandemic in 2019. This could suggest  there's still room for attractive returns. 

But even beyond these immediate  tailwinds, it's important to   consider the long-term potential of S-REITs. Since the end of 2010, S-REITs have returned 149%,   while Singapore equities, as gauged by Straits  Times Index, returned 89% over the same period.  

This shows that adding S-REITs in your portfolio  can help grow your investments steadily, with both   income and capital gains working for you. How to invest in S-REITs?  So how can you invest in S-REITs? There are  several ways: you can buy individual REITs  

through a brokerage, invest in REIT ETFs or  funds, or consider Syfe’s REIT+ portfolio,   which offers optimisations like  auto-reinvestment and no brokerage fees Let me go through the pros  and cons of each approach.

Investing in individual REITs gives you  more control and allows you to pick the   ones you're most confident in. You can get  potentially higher returns if you choose wisely. However, selecting the right REITs requires  significant research effort. Below is  

a snapshot of a framework and some common  metrics used to evaluate REITs. In addition   to quantitative measures related to financial  health and valuations, qualitative evaluations   of the underlying assets, the sponsors, and the  REIT managers are also necessary. I won't delve  

into each parameter in detail (feel free  to take a screenshot if you'd like), but   you can see that the commitment and  research required are substantial. Even after conducting thorough analysis,  outperforming the overall S-REITs market is not  

guaranteed. Plus, you'll incur brokerage costs,  and dividends aren't automatically reinvested. Another way to get exposure is through S-REIT  ETFs. Some of the ETFs are Singapore focused,   such as Lion-Phillip S-Reit ETF, while  some have exposure to Asia pacific,  

such as NikkoAM- StraitsTrading  Asia Ex Japan REIT ETF. REIT ETFs give you instant  diversification and lower volatility,   but you give up control and still need to  pay management fees and brokerage costs.

Finally, there's Syfe REIT+, one of our flagship  managed portfolios. REIT+ portfolio tracks the   SGX iEdge S-REIT Leaders Index, which focuses  more on the bluechip S-REITs. We partnered   with SGX to launch this portfolio, making  it the first to track this specific index.

Through the portfolio, you get exposure  to the top 20 most well-known and liquid   SGD-denominated S-REITs, with added efficiencies  like automated dividend reinvestment to enhance   long-term returns. There is an overall management  fee, starting from 0.25% per annum and Syfe covers  

all other transaction and brokerage fees.  There are also no other hidden charges. What I’d like to emphasize is that, instead of  fully replicating the iEdge S-REIT Leaders Index,   we use an optimisation process to construct our  index-tracking portfolio. Since its inception  

in April 2020, Syfe’s REIT+ portfolio has  consistently outperformed the benchmark,   almost every year, with an impressive  cumulative outperformance of +5.5%. The link to our REIT+ portfolio is in the  video description, check it out on our website.

While S-REITs tend to be less volatile  than stocks, they are still subject to   market fluctuations and sensitive to interest  rate changes. When allocating to S-REITs,   it's essential to view your investment  from a total portfolio perspective,  

ensuring balance and risk management. If you have any questions on how S-REITs  can fit into your portfolio allocations,   do reach out to the Advisory team. We will be glad  to share with you where we can add value to you.

Thank you.