Understanding Real Estate Investment Trusts (REITS)
Find out how real estate investment trusts (REITs) work, and what you should know if you are thinking of IPO.
What is a REIT?
A listed Real Estate Investment Trust (REIT) is a vehicle that invests in a portfolio of income-generating real estate assets with the aim of generating income for unitholders. Units of a listed REIT, like any other security listed on an exchange, are bought and sold at market-driven prices.
The investment objective of REITs is to generate income distribution and long-term appreciation potential.
A majority of the REIT's assets must consist of real estate assets. This may include commercial, retail, industrial, hotel, healthcare, shopping mall, office building, serviced apartment and residential properties located in specific countries.
The assets of REITs are professionally managed by REIT managers and property managers who charge a fee in exchange for their services.
The income generated by those assets (primarily rental income) is distributed to unitholders on a regular basis, usually after deducting expenses such as REIT management fees and property management fees.
REITs can have different structures, geographic or industry focuses, and some REITs may be exposed to more risks than others, such as political and regulatory risks.
Most REITs have annual managers’ fees, property management fees, trustees’ fees and other expenses that will be deducted from their income before distributions are made.
Tax Benefits
REITs that distribute at least 90% of their taxable income annually enjoy the tax transparency treatment by IRAS (subject to certain conditions). Individual investors who receive these distributions (dividends) are also tax-exempt.
Investment and Leverage Guidelines
REIT is subject to Appendix 6 of the Code on Collective Investment Schemes.
How it Works
A typical REIT structure works like this:
Funds are raised from unitholders through an initial public offering (IPO) and used by a REIT to purchase a range of properties.
These properties are then rented out to tenants.
In return, the income flows back to the unitholders (investors) as an income distribution (similar to a dividend)
Most REITs have annual REIT manager fees, property manager fees, trustee fees, and other fees that are deducted from their profits before distributions.
Some REITs that hold property in foreign jurisdictions may also be subject to taxation in the relevant jurisdiction. Investors can find information about these fees in the REIT's prospectus and financial statements.
The diagrams below show a typical REIT structure.
Buy/Sell property | | Ownership of assets | | |
Sponsors | <---> | Properties | <---> | REIT |
| | | Net property income | |
| | | | |
| Management services | | | |
Asset Management Co: Manager of REIT | <---> | REIT | | |
| | Management fees | | | |
| | | | | |
Appoints Property Manager | | | | |
| | | | | |
v | Property management services | | Own assets | |
Property Management Co: Property Manager | <---> | Properties | <---> | REIT |
Property management fees | | Net property income | |
| Acts on behalf of Unitholders | |
Trustee | <---> | REIT |
| Trustee fees | |
| Investment in REIT | |
Unitholders | <---> | REIT |
| Distributions | |
| Loan / Bond | |
Lenders | <---> | REIT |
| Interest / Coupon | |
Role in REITs
REIT structures typically have the following key roles:
1. REIT Sponsor
The sponsor sources properties that are injected into the REIT's initial portfolio and may continue to provide the REIT with a pipeline of assets.
Usually the sponsor also owns the REIT manager and shares in the REIT.
2. REIT Manager or Property Manager
A REIT manager formulates and executes the REIT's strategic direction in accordance with its established investment strategy. For example, it handles the acquisition and divestment of REIT assets.
In an externally managed model, the REIT manager receives a management fee, which includes a base fee and a performance fee, in exchange for its services. It may also charge additional fees, such as acquisition and divestment fees.
REIT managers typically appoint a property manager to manage the REIT's real estate. The responsibilities of a property manager include leasing out properties to achieve the best tenancy mix and rental income, developing marketing campaigns or programs to attract shoppers/tenants, and maintaining the property.
In return, the property manager will receive a property management fee from the REIT's assets.
3. Trustee
The duties of the trustee are set out in the trust deed. The independent trustee is responsible for holding the assets of the REIT on trust of the unitholders. Other duties may include ensuring compliance with all applicable laws and protecting certain rights of unitholders.
The trustee receives a fee for providing this service.
4. REIT Unitholders
Generally, REIT unitholders can:
Require the REIT manager or trustee to manage the REIT in accordance with the provisions of the trust deed
Remove a REIT manager
Read the trust deed and prospectus to learn about the benefits of REIT unitholders.
Types of REITs
There are a wide variety of REITs listed on the Singapore Exchange. Here are the broad categories of REITs you can invest in and the typical properties they own:
Commercial REITs - Office Buildings
Retail REITs - Shopping Centers
Industrial REITs - Warehouses, Logistics Facilities and Data Centers
Hospitality REITs - Hotels and Serviced Apartments
Healthcare REITs - Hospitals and Nursing Homes
Benefits for Property Owners
Optimizing capital allocation
Monetizing Illiquid real estate assets
Repurposing proceeds into value-added investments
Distributing proceeds to unitholders
A REIT's IPO portfolio may include assets owned by the sponsor or acquired by the REIT or the sponsor from other parties shortly before listing. REITs allow sponsors to acquire and grow their businesses from the capital markets. REITs create a steady stream of fee income from ownership of asset manager.
REITs are allowed to distribute in excess of accounting profits, maximizing valuations. Valuations are based on cash flows generated by assets.
Factors Considered in Assessing Suitability for Listing
In addition to other requirements in the Listing Rules, some of the factors that SGX RegCo considers in assessing the suitability of a REIT for listing are as follows:
The sponsor's track record, including its experience managing similar assets and the size of its assets under management;
The quality of the IPO portfolio, including asset location, anchor tenant profiles, lease/occupancy rates and, in the case of hotel properties, whether they are managed by a global branded hotel chain; and
The financial performance of the IPO portfolio and whether the operation of the underlying portfolio assets covers distribution per unit. Where a master lease exists, a distinction should be made between situations where the actual earnings generated by the underlying portfolio assets flow through and meet or exceed distributions to unitholders, and situations where the sponsor provides income support because the earnings do not match the required distribution.
Before You List: Considerations
Look for information in three key areas:
Information about REIT managers and sponsors – your experience and track record, and, if applicable, asset pipeline
Information about properties that will be put into a REIT - especially whether you are familiar with the geographic and industry risks of the properties you are considering putting into a REIT
Other investment information, such as dividend policy and fees
Is Listing of REITS Suitable for You?
Here's a checklist to help you decide whether to take your REIT public.
1. What are your assets?
Learn about these key areas:
Industry and geographic focus (particularly the stage of the real estate cycle in the country where the asset is located, the economic outlook for that country, any political or regulatory risks, any tax considerations)
Underlying assets (especially asset quality, such as the mall's brand, occupancy rate and tenant mix)
2. How is the REIT structured?
Information about:
Who is managing the REIT assets? For example, management qualities such as its reputation and track record, its growth strategy.
Who is the sponsor and what is the strength of the sponsor?
What are the expected fees (i.e. management fees, property management fees, trustee fees, acquisition and divestment fees, etc.)?
What is the gearing (leveraged) and debt maturity profile of the assets?
Does a particular asset have unique characteristics that may create additional risk?
3. What is the distribution policy?
What is the expected frequency and timing of distributions from the assets?
What adjustments are made to income in determining the amount to distribute?
Under what circumstances can assets not make distributions, such as insufficient cash flow?
4. What is your corporate governance?
Are you satisfied with your corporate governance? For more information, you can refer to the Governance Index for Trusts.
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