Once in a while, a reader or two would stumble upon the fact that I have a tiny portion of my portfolio allocated to Singapore REITs. I usually steer far, far away from the discussion of individual stocks, even when I’m asked about it. Instead, I would prefer to share a little reading material.
One of my favourite articles, originally published on The Business Times, that I like to share is written by Teh Hooi Ling, titled “The Pros And Cons Of Rights Issues In REITs”. However, I won’t be touching on rights issues (even though it is a really important topic for REITs) for today.
In the article, right at the end, is a mini-section named “Advice From Fund Manager” – reproduced here for your reading pleasure. Many investors are obviously swayed by the yields when deciding to invest in REITs or trusts.
Why do some REITs have higher yields?
For investors who are keen on Reits and other business trusts, here is some advice from a fund manager friend on how to go about picking the right ones.
‘Industrial properties usually have 30-year leases, or 30+30. Assuming a 30-year lease, it means it depreciates at a rate of 3.3 per cent pa, versus one per cent pa for a 99-year lease for a retail or commercial building. So the yields for industrial Reits have to be up to 2.3 per cent pa higher than retail or commercial Reits. Usually however, it is less due to the time discount factor.
‘Ships are usually scrapped after about 25-30 years. I think typically they are depreciated over 15 years or so. Even if ships are scrapped after 30 years, shipping trusts should command a higher yield than industrial Reits because the ship lessee can ‘disappear’ with the ship, but not the industrial building tenant.
‘Hospital Reits like Parkway Reit is a rare breed as its revenue is based on a consumer price index formula. You can think of it as having zero vacancy rate (but the main issue is counterparty risk). So given the same counterparty risk, it should trade at a lower yield than retail Reits, which should trade at lower yields than commercial Reits, given the same tenure (because it’s easier to lease out retail units).
‘In turn, commercial Reits should trade at lower yields to industrial, which should trade at lower yields to hospitality (as vacancy rates of hotels/service apartments can be quite high during recessions).
‘Hospitality Reits should trade at lower yields to shipping.
‘But note that industrial can trade at higher yields to hospitality as the former has shorter tenures.
Does it help to explain why Parkway Life REIT is the lowest yielding REIT? In recent news, Rickmers Maritime Trust has suspended dividend distribution. Do you know the different between REIT vs trust? Does the current yields of REITs corresponds to what was mentioned in the article?
If you are interested in REITs, do pick up a copy of this book at your favourite library or bookstore – you won’t regret it.
More Than Index Investing
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