Introduction to SREITS

Credits to Sing T.F. "The Rise of Singapore's Real Estate Investment Trust (SREIT) Market"

What are REITS

An REIT is a securitised vehicle that converts typically illiquid real estate assets into liquid tradable securities. This is since REITs are a collective investment scheme, allowing investment in a small denomination of REIT units, without having to fork up large equity upfront. REITs serve as a conduit to funds flow from regions with surplus funds to regions with abundant supply of real estate opportunities.Typical characteristics of a REIT:

• perceived as a defensive stock distributing >90% of earnings on a regular interval to investors as dividends
• Tax exemptions to dividend payouts by REITs to individuals and qualified non-individual investors

In summary, REITS are viewed as a hybrid instrument combining features of stocks, bonds and real estate.

Some SREIT history

CapitaLand Limited launched the first REIT IPO in Nov 2011 - SingaMall Property Trust ("SPT") which owned three shopping malls: Junction 8, Tampines Mall, Funan the IT Mall. However the low book order resulted in the IPO being scrapped. One reasons floated for the poor acceptance was a lack of investor education, particularly since it was a relatively new product in Singapore.The SPT was restructured and relaunched as CapitaMall Trust (rebranded as CapitaLand Mall Trust in 2015) , and was oversubscribed by five times.

Source: CMT IPO Prospectus, 2002

Subsequently, Ascendas Land (Singapore) Pte. Ltd launched the second SREIT, Ascendas REIT which owned a portfolio of eight business parks, light industrial and built-to-suit properties.

SREIT Commercial Rationale

1. Developers use the REIT vehicle as an exit strategy to unlock the values of their commercial real estate assets. By converting relatively illiquid real estate assets into liquid REIT securities, developers could operate a more efficient "asset light" model with reduced assets on their balance sheet. You may read more about developers here

2. By retaining controlling stakes in REITs, developers continue to enjoy a steady income stream from real estate, while substantially reducing the liabilities on their balance sheet

3. Generate recurring fees by providing real estate fund management services to REITS. The service providers includes both traditional "brick and mortar" developers and third-party asset managers such as ARA Asset Management Limited.

4. Real estate assets are usually priced at a discount to their Net Asset Values (NAVs) when held in developers' books. A "fairer" price by the market can be achieved by separating the stable property income streams from the volatile development business.

SREIT Growth Strategies

As with most things in life, we examine the incentives for the parties involved. Since asset management fees are pegged to NAVs, SREIT managers would pursue one of two growth strategies to create value for SREIT unit holders. These are funded by 

• using new debt
• issuing new equity units via secondary public offers to existing unit holders and new investors

a) Dynamic Growth i.e. acquire yield-accretive assets

Market timing is key to acquiring new properties. This includes whether real estate owners are willing to sell, and also the cost of raising new capital in equity markets.

Source: CMT 2015Q3 financial results

b) Organic Growth i.e. asset enhancement initiatives (AEI)

This is traditionally achieved via sprucing up physical structure and adding new features to existing buildings. Other ways include tearing down and redeveloping an existing structure into a new building. To minimise disruption to income streams, a more popular strategy is to carry out AEIs in phases. One example would be the redevelopment of Funan undertaken by the pioneer SREIT, see more information in the press release here

Source: CMT 2015Q3 financial results

Tax Treatment 

Please see the latest IRAS e-Tax guide here

At the time of writing, the latest was the Seventh Edition published 24 Jun 2020.

REITs are accorded tax transparency status subject to compliance with the investment and distribution conditions. Tax transparency generally means that the specified income will not be taxed in the hands of the trustee of the REIT, but will only be taxed in the hands of the unit holders (i.e. the beneficiary of the distributions received from the trustee), unless the unit holders are specifically exempted from tax.

What Lies Ahead

Gazing into the crystal ball, the SREIT market faces headwinds from other Asian REIT markets including China and India. It would be wise for Singapore to continue setting good corporate governance requirements, and consider new REIT models (e.g. the externally-advised model in the US REIT market) to maintain market leadership.

What do you think are the propects for SREITs in the near/long term? Let me know in the comments below!