REITs with overseas assets has become increasingly popular and have proliferated on the SGX in recent years.
These REITs span across all sub-sectors from classes from office, retail, industrial to even data centres.
As an investor, what are the things to look out for before investing in REITs with overseas assets vs those that focus on Singapore only?
We won’t mention REITs that have a mix of Singapore and overseas assets, such as Suntec REIT, because they are more difficult to analyze compared to those solely with foreign or Singapore assets.
This difficulty arises because the local/foreign asset mix has a differing impact on performance, risk and returns.
First up, let’s see which REITs have solely foreign assets and which only have Singapore assets.
|Office||CapitaLand Commercial Trust||IREIT Global (Europe)
Manulife US REIT (US)
Keppel KBS US REIT (US)
|Retail||CapitaLand Mall Trust
Frasers Centrepoint Trust
Mapletree Commercial Trust
|BHG Retail REIT (China)
CapitaLand Retail China Trust (China)
Fortune REIT (HK)
Lippo Malls Indo Retail Trust (Indonesia)
Mapletree Greater China Commercial Trust (China)
|Industrial||AIMS AMP Capital
Mapletree Industrial Trust
Viva Industrial Trust
EC World REIT (China)
In the office sector, there are more foreign than Singapore REITs. In the retail sector, there are more pure play foreign REITs, while in the industrial sector, there are more pure play Singapore REITs.
On the other hand, there are many industrial buildings in Singapore which might explain why there are many more pure play Singapore than foreign industrial REITs.
What are the two key differences between a pure play Singapore and foreign REIT?
In the office sector, CapitaLand Commercial Trust, has a lower yield than its foreign counterparts. Based on Shareinvestor’s WebPro platform, CapitaLand Commercial Trust has a yield of 4.7% compared with IREIT Global (7.7%), Manulife US REIT (6.3%) and Keppel-KBS US REIT (6.8%).
Finance theory tells us that for any financial instrument, the higher risk there is to an investor, a commensurately higher return needs to be provided.
Foreign REITs carry a host of risks that are not present to Singapore focused REITs.
Some of these include foreign exchange or currency risk, political and regulatory risk.
Investors in foreign REITs therefore bear a higher level of risk and are likely to be compensated with a higher yield.
The same situation can be found in retail REITs where all the foreign focused REITs have a higher yield than their Singapore counterparts.
The Singapore focused REITs have yields of:
|CapitaLand Mall Trust||5.4%|
|Frasers Centrepoint Trust||5.4%|
|Mapletree Commercial Trust||5.7%|
The foreign focused REITS have yields of:
|BHG Retail REIT (China)||7.1%|
|CapitaLand Retail China Trust||6.6%|
|Lippo Malls Indo Retail Trust (Indonesia)||10.3%|
|Mapletree Greater China Commercial Trust (China)||6.2%|
Fortune REIT is excluded because the trading currency of HKD is different from all the other REITs being considered here.
In the industrial sector, EC World REIT, as a China focused REIT, has a higher yield of 8.2% than most Singapore focused industrial REITS.
Even though Frasers Logistics and Industrial Trust is an Australian focused REIT, its yield of 6.4% is lower than many other Singapore focused REITs.
One reason for this could be that Australia as an investment destination is safer than Singapore due to its mature economy, developed country status and robust regulatory framework.
Generally, foreign focused REITs across all sectors have a higher yield than Singapore REITs but investors should be careful not to pile into foreign REITs just because of this! Foreign REITs do carry risk that are not present with Singapore focused REITs.
Also read: Keppel KBS-US REIT beats their IPO forecasts
There is no clear pattern that shows overseas REITs having a higher interest rate than their Singapore counterparts, or vice versa.
Instead, what might really affect interest rate levels is whether the REIT borrows Singapore Dollars (local currency) or foreign currency and the quality of Sponsor.
In the office sector, CapitaLand Commercial Trust has an average cost of debt of 2.6% as of 4Q2017, compared with 3.35% for Keppel KBS-US REIT and 2.8% for Manulife US REIT.
The exception is IREIT which has an interest rate of 2%, mainly due to the low interest rate environment in Europe.
So in the office sector, it isn’t apparent that foreign focused REITs definitely have a lower cost of debt.
The same mixed pattern can be seen in the retail sector.
Singapore focused REITs, Frasers Centrepoint Trust has an interest rate of 2.4% while Mapletree Commercial Trust has theirs at 2.7% and SPH REIT at 2.8%.
Overseas focused REITs, such as CapitaLand Retail China Trust has a cost of debt of 2.5% and Mapletree Greater China Commercial Trust has theirs at 2.7%.
At the higher end, BHG Retail REIT has an average cost of debt of 3.7% and Lippo Malls Indonesia Trust has theirs at 4.7%.
One observation is that even though CapitaLand Retail China Trust has properties in China, their cost of debt is low and almost on par with Singapore focused REITs.
It is even lower than that of SPH REIT, whose sponsor is a well-known Singapore company.
Also, comparing CapitaLand Retail China Trust and BHG REIT, one would think the cost of debt would be similar since they both have assets in China.
However, the difference in their cost of debt is slightly more than 1%, which is a fairly substantial figure.
Why could this be so? This is because there are some nuances that need to be taken into account when looking at the two REITs.
One possibility is that CapitaLand Retail China Trust has been listed for many years while BHG is a recent entrant to the market. Investors therefore feel safer given CapitaLand Retail China Trust’s track record.
In addition, CapitaLand Retail China Trust arguably has a strong sponsor in the form of CapitaLand that is known to Singapore investors while BHG’s sponsor, though well known in China, may not be so familiar to Singaporean investors.
In the industrial sector, the cost of debt borne by various REITs are also mixed.
Two foreign focused REITS, Frasers Logistics and Industrial Trust and EC World REIT have a wide range of debt cost, the former at 2.8%, and the latter at 5.3%.
With Singapore focused REITs, the picture is mixed.
Mapletree Industrial Trust has the lowest interest rate at 2.9% and Viva Industrial Trust has the highest at 3.9%.
The other Singapore focused industrial REITs have debt cost of
- 6% – AIMS AMP Capital
- 55% – ESR REIT
- 9% – Sabana REIT
- 2% – Soilbuild REIT
- 9% – Viva Industrial REIT
One key takeaway is that the Sponsor could in some way provide “brand name” and backing to the REIT, helping it to secure a good credit rating, and therefore allowing it to borrow at more favorable terms.
So, investors should not always think that Singapore focused REITs will be shielded in a rising interest rate environment, because some of them do have a relatively higher cost of borrowing.
As an investor, choosing a local or foreign REIT investment should not be a cause for headache.
It is safe to say that for new investors who are dipping their toes in REIT investing, buying Singapore focused REITs makes more sense because there is a sense of familiarity with local properties.
In addition, it is easier for investors to make a trip to visit the properties in Singapore that are owned by the REIT.
Think visiting Bugis Junction or Plaza Singapura if you wanted to get a feel of how CapitaLand Mall Trust is performing.
You don’t have to pay for an air ticket to go abroad and check out how the REITs’ properties are doing.
Seasoned investors can consider foreign assets once they grasp how the various factors such as currencies, tax regimes and country specific real estate factors can influence the investment.
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Happy REIT investing!