Top 3 Mistakes To Avoid When Investing In REITs Listed In Singapore

Investing in Real Estate Investment Trusts (REITs) can be a powerful way to generate passive income, especially for those planning their retirement in Singapore.

REITs offer a unique combination of dividend payouts and long-term capital preservation abilities, all without the hassle of owning physical property.

However, as with any investment, it’s easy to fall into common pitfalls that limit your returns or increase your risk. Here are the top 3 mistakes that you need to avoid when investing in REITs to avoid losing money:

1. Ignoring the Type of REIT You’re Investing In

Mistake:

One of the most common mistakes is treating all REITs the same.

REITs can own different types of real estate focusing on various sectors of the economy, including hospitality, retail, offices, industrial and health care. Each sector has its unique tenant profile, returns and risk that investors should pay attention to.

In addition, the majority of the REITs listed in Singapore often invest in offshore real estate which exposes the REIT to a different economic, political and social environment that ultimately would impact the return and risk profile of the REIT.

Why It’s a Problem:

Different types of REITs perform well under different economic conditions.

For example, industrial REITs may struggle during economic downturns while healthcare REITs tend to be less sensitive to the economic cycles. Not understanding the specifics of the REIT sector can leave you exposed to unexpected risks.

On the topic of offshore real estate, apart from the different economic and political environments, investors would also have to deal with the impact of foreign exchange risk. This is especially so if you are staying in Singapore and are spending in Singapore Dollar (SGD).

Historically, the strength of SGD has been rather resilient which had translated into foreign exchange losses that dragged the dividend yield of REITs with offshore properties.

How to Avoid It:

Before investing, research the sector that the REIT focuses on and ensure it aligns with your investment goals and risk tolerance. Diversifying across various sectors can also reduce risk and improve long-term stability.

For individuals located in Singapore who depend on their REITs for passive income in SGD, it may be beneficial to prioritize REITs with a greater percentage of local properties in their portfolio. This strategy can help mitigate the potential impact of foreign exchange risk on your dividend payouts.

2. Blindly Chasing High Dividend Yields

Mistake:

Many new REIT investors are attracted to the high dividend yields that some REITs offer, thinking that the higher the yield, the better the investment without paying attention to the fundamentals nor the components that form the dividends that they are receiving.

Why It’s a Problem:

While high yields can be tempting, they often come with higher risks. A REIT that offers an unusually high dividend may be over-leveraged or struggling with declining property values.

Examples of such a REIT include Elite Commercial REIT, Manulife US REIT and Prime US REIT.

High yields can sometimes be unsustainable, leading to dividend cuts or even the loss of capital if the REIT underperforms. This is especially so given that it is a common practice for Singapore REITs to pay their management fees in units, thereby artificially increasing the reported dividend yield.

Over the years we’ve seen a few REITs suffer from massive dividend cuts as the REIT managers unwind their decision to pay themselves in units when the share price is not performing well. This also resulted in further share price decline as investors rushed for the exit.

Examples of such REITs include IREIT Global, United Hampshire US REIT and Cromwell European REIT.

You can read more about my own experiences with this mistake for a more in-depth explanation of this particular point. Read more: [Case Study] Why I Sold Off My Keppel REIT Shares

How to Avoid It:

Instead of chasing high yields, focus on the sustainability of a REIT’s dividends from operation instead of being misled by the headline-reported dividend yields.

Look for REITs with consistent top and bottom-line performances and strong management. A moderate, sustainable yield is often a better long-term investment than a high, unsustainable one.

3. Failing to Understand the REIT’s Management

Mistake:

Many investors overlook the importance of management when selecting a REIT. They focus on financial metrics and properties without considering who is making the key decisions.

Why It’s a Problem:

A REIT is only as strong as its management team. Poor management decisions, such as overpaying for properties, neglecting property maintenance, or failing to adapt to market trends, can lead to underperformance. Additionally, REITs may have conflicts of interest where the management’s priorities may not align with the shareholders.

Having gone through all the REITs listed in Singapore, I can assure you that the source of a REIT’s underperformance is often linked to the incompetency of the REIT manager. The most obvious red flag that I’ve observed is when there is no consistency or clear strategic direction on how the REIT is being managed as well as unexplainable acquisitions that are often not yield accretive.

Common examples are Sabana REIT, Lippo Malls Indo Retail Trust and Manulife US REIT.

How to Avoid It:

Research the track record of the REIT’s management team. Look for teams with a history of making sound, strategic decisions and delivering consistent performance. Good governance and transparency are key indicators of a well-managed REIT.

Instead of analysing only the latest annual report of financial highlights, you should be conducting a detailed horizontal analysis to assess the consistency of the REIT's performance over at least 5 years against the different analytical metrics to help you understand how the REIT is being managed and whether that aligns with that the manager communicates.

Conclusion

REITs are a valuable tool for investors seeking passive income, especially in retirement. By avoiding these common mistakes you can maximize the benefits of REIT investing while minimizing risk.

Always take the time to understand the REIT you’re investing in, and continuously monitor and adjust your portfolio to stay on track with your financial goals. With the right approach, REITs can provide a steady stream of income and long-term financial security for your retirement.

If you would like to read my analyst report on Singapore Listed REITs, you can find them on my telegram channel:

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If you would like to learn about REIT investing, you can find my entire methodology in my eBook: Retire With REITs here:

If you are looking for personalized financial advice, I offer a 1-to-1, fee-only consultation where you will receive personalized strategies to design, implement and manage a profitable REIT portfolio. You can find out more about it here: