S-REITs Structure & Span

• Modest growth, higher than normal headline inflation and support through regional demand for hotels, restaurants and retail were key relevant takeaways in the MAS report on Recent Economic Developments in Singapore.

• The objective of an S-REIT is to raise capital to invest in real estate assets. The real estate  industry can be highly diversified in foundation and can facilitate the requirements of a number of consumer and business interests.

• The aggregate span of the 22 S-REITs cover retail, residential, commercial, mixed-commercial, healthcare, hospitality and industrial sectors with yields distributed to investors on either a quarterly or semi-annual basis.

The FTSE ST Real Estate Investment Trusts (REIT) Index declined 5% over the month of August 2011, in contrast to the FTSE Straits Time Index (STI) which declined 10%. As of Friday 2 September, over the past 12 months the FTSE ST Real Estate Investment Trusts (REIT) Index, is down 1% in contrast to the STI which is down 2%. The FTSE ST Real Estate Investment Trusts (REIT) Index is composed of  more than half the REITs traded on the SGX

MAS Quarterly Statement

In terms of the market environment for real estate investment trusts, modest growth, higher than normal headline inflation and support through regional demand for hotels, restaurants and retail were key relevant takeaways in the Monetary Authority of Singapore (MAS) report on Recent Economic Developments in Singapore. This report was released Thursday and can be read here.

The MAS estimate that Singapore’s GDP growth will reach between 5-6% in 2011 with economic activity likely to grow modestly over the second half. In terms of growth granularity support will come “by services which are driven largely by Asian demand such as in the tourism industry, even as activity in the manufacturing and trade-related sectors remains sluggish.” Over the last quarter “tourism-related industries, such as hotels & restaurants and retail, continued to register steady gains, supported by resilient regional demand.”

The MAS also pointed out that the downside risks in the “external environment have heightened in recent weeks, including weaker growth prospects in the US and Europe.”

On the inflationary front, the MAS stated that "CPI inflation is expected to come in at slightly over 5% in the next few months, boosted by accommodation and private road transport costs, before slowly trending down towards the end of the year. Excluding these items, MAS Core Inflation will be lower, although it will still be firm due to the continued pass through of earlier commodity price hikes and wage increases."

There are 22 Singapore Exchange REITS (S-REITs) in total , with two thirds of these trusts holding assets outside Singapore, across the Asian region. The key sectors that the 22 S-REITs represent are commercial, healthcare, hospitality, industrial, mixed commercial, residential and retail.

S-REIT Structure

The objective of an S-REIT is to raise capital to invest in real estate assets. The real estate  industry can be highly diversified in foundation and can facilitate the requirements of a number of consumer and business interests. The aggregate span of the S-REITs cover retail, residential, commercial, mixed-commercial, healthcare, hospitality and industrial sectors.

S-REITs have a mandate to distribute at least 90% of their distributable income on a quarterly or semiannual basis. This produces a yield to investors that is equates to the annualized distribution per unit divided by the S-REIT price.

A key variable of an S-REITs is its net asset value (NAV) that, as defined by the MAS Code on Collective Investment Schemes, measures the “total assets less total liabilities (excluding unit holders’ interest if this is classified as a liability)”.

Leverage and balance sheet liabilities are not only important topics, they require investor understanding of how the mandatory principles apply to the S-REITs. A key difference of the S-REITs to a Property Trust is that the S-REIT holding ratio of developed assets must be more than 90%.

S-REITs have an aggregate leverage limit that is defined in section 9 of the MAS Code on Collective Investment Scheme. The first two subsections outline the S-REIT leverage requirements as follows:

9.1 - Borrowings may be used for investment or redemption purposes. A property fund may mortgage its assets to secure such borrowings.

9.2 - The total borrowings and deferred payments (collectively, the “aggregate leverage”) of a property fund should not exceed 35% of the fund's deposited property. The aggregate leverage of a property fund may exceed 35% of the fund’s deposited property (up to a maximum of 60%) only if a credit rating of the property fund from Fitch, Moody’s or Standard and Poor’s is obtained and disclosed to the public. The property fund should continue to maintain and disclose a credit rating so long as its aggregate leverage exceeds 35% of the fund’s deposited property.

Section 9.3, 9.4 and 9.5 provide further elaborations and the full document can be read here.

From a taxation perspective, REITs currently provide an exemption on dividends to individuals, both local and foreign. The withholding tax for non-resident institutional unit holders has been reduced from 20% to 10% for the five years to 2010. These initiatives have been extended to 31 March 2015.

REITs Traded on SGX

The FTSE ST Real Estate Investment Trusts (REIT) Index is composed of 14 REITs, a property trust (Ascendas India Trust) and a stapled security (CDL Hospitality Trust). The REITs that are included in this index are detailed in the table below, that also includes the respective location of assets, sector coverage and dividend yields.

Note: Dividend Yields sourced from Bloomberg

With the strong regional focus of S-REIT assets, it should be noted that S-REITS account for 30% of the REITS market in Asia. Moreover, SGX is the leading REITs and Property listing venue in the Asia Pacific with six listings since 2010. The Fortune REIT, detailed in the table above was the first cross border Asian REIT listed.

The range of property sectors covered by S-REITs make this form security elastic to the ups and downs of the consumer market and business cycles of Singapore and the region. Investors can obtain more information on the 22 S-REITs through respective prospectuses and websites.

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