Here’s Why Singapore REITs are the New Bonds in 2020

Invest - What Type of Singapore REITs Should You Buy

Author: Tim Phillips

Date: May 28, 2024

Share this

Everyone has heard of trying to follow that typical “balanced portfolio” of 60% stocks and 40% bonds. However, in a world of near-zero interest rates, it’s looking increasingly obsolete.

The calls from investors for it to be abandoned are growing louder. It’s understandable. Globally, there’s over US$15 trillion of negative-yielding debt.

With many bonds, you get close to zero return. In fact, for some, you pay for the honour of holding a safe asset.

Clearly, that doesn’t translate well into generating sustainable long-term returns on your capital. So here’s why I see real estate investment trusts (REITs) as ideal candidates to replace bonds in any “balanced” portfolio.

Give me yield

This “hunt for yield” from investors has been one of the defining features of stock markets ever since the aftermath of the Global Financial Crisis back in 2009.

That’s because interest rates are low and likely to stay there for a while. Given REITs are interest-rate sensitive, they’re likely to continue benefitting from easy monetary policy globally.

In Singapore, the case for owning them – from an income generation perspective – is strong. Despite some REITs, particularly in the retail, hospitality and commercial sectors, cutting distributions recently, they’re still yielding in the range of 3-5%.

That is well ahead of both the 10-year US Treasury (0.7%) and the 10-year Singapore Government Bond (0.9%). Given the trend (see below), talk of negative-yielding US Treasuries are no longer dismissed as outlandish in economic circles.

US 10-Year Treasury Yield 2006-2020

US 10-year Treasury yield investing

Source: MarketWatch

So, with Singapore REITs possessing a significant yield premium, investors of all stripes should be thinking about allocating to them to generate longer-term passive income. How do you go about this though?

Real estate investing

So, beyond using REITs as a substitute for bonds in a portfolio, I’d argue that it can also feature as real estate exposure for many younger investors.

With stratospheric property prices, owning an investment property isn’t as clear cut a proposition as it used to be.

I stress “investment” because I believe that from an income/yield perspective, buying a property in Singapore is poor value for money versus investing in REITs.

With REITs, you can buy a small piece of many properties that are income-generating assets. Over the past few years, Singapore REITs have also been venturing more overseas to acquire real estate.

That’s been a great boon for shareholders from a geographical diversification standpoint. Then you’ve got the reliable recurring income from REITs for your portfolio while also giving you global real estate exposure.

For younger investors, or even older ones looking to generate passive income, it’s a great area of the Singapore market to focus on.

Finding the sweet spot

For me, gauging the right kind of Singapore REITs to invest in means striking a balance between yield and growth.

Many times, investors seek out the REIT with the highest yield but this tends to be a trap. Either the yield is artificially high because the stock price has fallen sharply recently, or the stock market believes that the REIT will cut its dividend.

In both scenarios, it means that investors lose out – via destruction of the share price or destruction of the dividend payout.

Second, when investing in REITs I’ve always adhered to the mantra of “bigger is better”. What does that mean? It entails identifying the biggest (by market cap) and best REITs in particular sectors, which have strong sponsors and manageable leverage.

The reasoning is pretty straightforward. Large cap REITs in Singapore have consistently outperformed mid- and small-cap ones for a while now.

Praying for smaller REITs to start outperforming their large-cap brethren usually ends in tears. That’s for a number of reasons. Small- and mid-cap REITs are less liquid in the market (which institutional investors don’t like).

Furthermore, their access to debt and funding is dwarfed when compared to the REIT giants backed by the likes of CapitaLand, Frasers or Mapletree Investments.

Structurally, smaller REITs are at a huge disadvantage in the Singapore REIT market.

Focus on quality

Just like stocks, investors should focus on quality REITs because these are the ones that are likely to outperform the market over the long term.

Although not always the case, it tends to be that the biggest REITs have the best real estate assets. Again, just like stocks in other markets, investors have to pay up for quality.

But, if you do indeed pay up, you’re likely to be rewarded with growing dividend payouts (and rising unit prices) over the long term.

This material is categorised as non-independent for the purposes of CGS-CIMB Securities (Singapore) Pte. Ltd. and its affiliates (collectively “CGS-CIMB”) and therefore does not provide an impartial or objective assessment of the subject matter and does not constitute independent research. Consequently, this material has not been prepared in accordance with legal requirements designed to promote the independence of research. Therefore, this material is considered a marketing communication.

This material is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CGS-CIMB’s clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this material. The information and opinions in this material are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, derivative contracts, related investments or other financial instruments or any derivative instrument, or any rights pertaining thereto. CGS-CIMB have not, and will not accept any obligation to check or ensure the adequacy, accuracy, completeness, reliability or fairness of any information and opinion contained in this material. CGS-CIMB shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

About the Author: Tim Phillips