5 common mistakes Singapore REIT Investors Make

5 common mistakes Singapore REIT Investors Make

As I progressed into the 12th year of investment since my first REIT, I decided to pen a post on the 5 common mistakes REIT investors may make.

But instead of a theoretical piece (DO's vs DON'Ts), I will pepper this post with personal examples of my Hits (gems) and Misses (painful lessons) drawing from the 20+ REITs I have invested in.

Note: This post was contributed by me on Dividend Titan's blog here ==> 5 Big Mistakes Beginner Singapore REIT Investors Make. Grateful for @Willie for his invitation to pen a post as a guest contributor to his blog (https://www.dividendtitan.com) 🥰

Mistake 1) Chasing Highest Dividend Yield (looking down on low dividend yield)

One of the biggest mistakes REIT investors make is focusing solely on headline dividend yield.

A high yielding REIT may look attractive today, but it does not guarantee strong long-term returns. Likewise, a lower yielding REIT should not be automatically dismissed.

Let's look at the 2 personal examples from my portfolio:

(1) IREIT Global:

I bought IREIT Global at IPO for the projected 8% yield, with 4 freehold office buildings at strategic locations in Germany (Europe’s largest economy), with 100% occupied properties, mostly by blue chip or government-linked tenants.

However, the portfolio of 4 properties with high concentration of tenants (Top 5 tenants accounted for 90+% of revenue). Their expansion into Spain and France did not take off. Loss of major tenant in 1 German property resulted in high vacancy, tried to convert vacant single-tenanted property into multi-tenanted property but it was hard to backfill. Declining distribution per unit (DPU) for past 7 years.

The result? My high 8% dividend yield crashed to 3.9% with DPU cuts over the years, and I sold it at a painful loss of ~53%!

(2) AIMS Apac REIT:

In contrast, AIMS APAC REIT initially offered a lower yield of ~5.4% when I bought it in 2016.

But the management was shrewd at acquiring hidden gem properties or optimisation of under-utilised assets. While the REIT started small, it expanded steadily and grew their dividends over the years.

What impressed me was the Management's keen eye to optimise land use through redevelopment of older properties or asset enhancement initiatives to maximise land use intensity and securing long term tenants. They ventured into built-to-suit properties for niche customers with locked in long leases. Recently, management also pivoting to data centre assets.

Today? My low dividend yield on cost grew from 5.4% (at purchase) to 7.8%, not to mention Reit price grew by ~24%.

The lesson? Do not blindly chase after the highest yielding dividend Reit! Neither should we look down on low dividend yield Reits. In REIT investing, management quality, asset strategy, tenant resilience, and long-term growth matter more than headline yield alone.

Mistake 2) Over-concentrating in 1 REIT sector or single asset

Another common mistake is over-concentrating in a single REIT sector or concentrated assets. Even within the same sector, not all REITs are created equal! For example, let's compare the 2 retail REITs below.

- Frasers Centrepoint Trust (FCT):

FCT owns a purely Singapore-based suburban retail portfolio (~$8.3B). The suburban shopping mall giant with 9 key assets in neighbourhoods and key transportation nodes (see image below) serves ~3 million catchment population.

Importantly, no single property constitutes more than 25% of total portfolio, while their top 10 tenants account for less than 20% of revenue. This creates a diversified and resilient income stream.

Credit: Image from FCT's website and fact sheet

- Starhill Global Reit:

Starhill Global REIT owns ~$2.8B of properties across Singapore, Malaysia, Australia, China and Japan.

While the majority of its properties (~62.5%) are also in Singapore but it is concentrated in only 2 assets - Wisma Atria and Ngee Ann City.

Both are within the Orchard Road shopping belt and heavily reliant on tourists. In addition, Starhill’s top 3 tenants account for ~46% of their gross revenue.

Imagine if any of these top tenants decide not to renew their leases, it would adversely impact the REIT price and affect unitholders’ DPU.

Mistake 3) Not understanding the role of rights issue in REITs growth

A lesser-known fact - REITs typically return 90% of earnings to unitholders.

Hence, with little retained earnings, when REITs require capital to acquire properties or asset enhancement initiatives (AEIs), REITs turn to investors for funding by issuing new Reit units through rights issue.

If unitholders are unable or unwilling to participate in the rights issue, they risk diluting their unitholding with a shrinking DPU.

If investors participate, they need to fork out more money to purchase the rights to maintain their unit holdings and dividends.

However, it should be noted that if executed well and for the correct reasons (e.g. acquisition of strong properties to enhance the REIT's income), rights issue can benefit unitholders.

From personal experience, I would offer 1 positive and 1 negative example below:

Positive example: Keppel DC REIT

Since its IPO in 2014, Keppel DC Reit carried out 4 rights issue exercises to fund acquisition of new data centres. I participated in all the rights issue.

While my purchase price averaged up from $0.93 (IPO in 2014) to $1.57; based on its current price of $2.27, that’s a capital gain of ~44% on paper!

My DPU for Keppel DC also increased by a ~57% from 2015 to 2026. Great use of investors’ monies through rights issue to grow total returns (capital gains + dividends)!

Unfortunately, not all rights issues lead to good outcomes for investors.

Negative example: IREIT Global

IREIT Global also IPO-ed in 2014, and carried out 3 rights issue exercises to fund acquisitions. I also pumped in money in all 3 rights issue.

However, its price tanked by ~74% from $0.88 at IPO (in 2014) to $0.23 (in 2026).

In addition, IREIT Global’s DPU tumbled by ~66% from in 2015 to 2026. NOT a pretty sight for loyal unitholders putting our hard-earned monies to support their rights issue!

Mistake 4) Treating REITs like bonds or fixed deposits

Although REITs provide relatively stable dividend as income on a quarterly or half-yearly basis, investors should not treat REITs like a bond or fixed deposit.

Unlike bonds or fixed deposits, where fixed interest is paid out and the capital will be returned to investors upon maturity, REITs are equity instruments with equal chances of capital appreciation or sustaining capital losses, or even dividend cuts.

Although REIT prices are usually more stable than stocks since REIT investors are paid passive income over the long run (compared to stocks when investors only make money when they sell), we should not mistake REITs as safer instruments like bonds or fixed deposits.

Mistake 5) Ignoring interest rates risk or hoping for interest cuts

During the Covid pandemic, when interest rates were cut to zero, many investors piled into REIT investments, some even used leverage to buy beyond their means.

However, many did not realise that REITs performance is tied closely to the interest rate environment as REITs uses substantial leverage for their operations and acquisitions.

Hence, when interest rates were hiked fast and furious in the 2022 and 2023 period, many REIT investors were adversely affected, especially those who invested in vulnerable REITs with high gearing and/or large amounts of floating-rate debt.

The lesson? Do not assume interest rates will always remain low. Always pay attention to a REIT's debt profile, gearing ratio and interest coverage.

Conclusion:

While there is NO perfect REIT, if we can avoid the 5 mistakes above, I believe we can all make money from Reits.

If you are a beginner getting started in REIT investing, I hope this piece provides a kickstart guide☺️.

If you are a REIT veteran, may this resonate with you or serves as a reminder in our lifelong investing journey 😉

To your money and health,

Mr MoneyandHealth (Mr MH) 🥰

Disclaimer: The author is NOT endorsed by any REITs mentioned above to write this post. The author may have been, is still vested or will be investing into the REITs mentioned above. The above article is purely the author expressing his layman views and should NOT be taken as financial advice, and NOT a recommendation to buy or sell any stocks or REITs. Pls do your own due diligence and/or consult a qualified financial advisor before making any moves or taking any actions. Pls note that past performance or track records is not an indicator or guarantee of future performance or potential.