Are REITs Good Retirement Investment Products?
Real Estate Investment Trusts or REITs are listed investment vehicles that pool investors’ capital to invest in investment properties such as retail malls, office buildings, industrial property or hotels. These investment properties are then leased out to tenants to earn rental income, which is distributed tax-free (or called tax transparent) to the REIT investors (except for corporate investors) in the form of dividends.However, in order to qualify for the tax transparency benefit, REITs must distribute at least 90% of their rental cash flow to their investors as dividends.
Other than the tax transparency benefit, REITs also finance their property investments through debt and tend to have a fair amount of debt on their balance sheets. In Singapore, there is currently a regulatory limit that capped Singapore REITs (or SREITs) debt-to-asset level at 45%. Thus, for SREITs with debt-to-asset gearing level approaching 45%, they would often do an equity rights issue or placement to lower their gearing level.
Lastly, SREITs tend to pay out higher dividend yield than other listed companies partly due to SREITs higher dividend payout ratio (of at least 90%) and tax transparency benefit. For example, the average dividend yield currently paid out by the SREITs sector is around 5.5-6%, significantly higher than the Singapore equity market (as represented by the Straits Times Index) dividend yield of 2-3%. This, coupled with the fact that SREITs rental income tends to be recurring and relatively stable in nature (as rental tenancy contracts are typically signed for at least 2-3 years except for hotels), makes SREITs a good retirement investment product.