How To Generate Passive Income With Dividends In Singapore?

As investors there are different approaches we can adopt. In Singapore, one common approach that investors love is dividend investing through Singapore REITs. It is also commonly known as income investing. Such an approach is pretty much passive as compared to other investing strategies that may take up more time. It is also a favorite investment vehicle among retirees who seeks to outpace inflation and get a regular source of income.

What are REITs?

Many of us would be familiar with the idea that there are investors that invest in brick-and-mortar assets such as commercial real estate property to get regular rental income and possible capital appreciation. A REIT (real estate investment trust) works in a similar fashion as a listed company that owns and operates properties and gets rental income from the tenants. REITs are well regulated by the Monetary Authority of Singapore (MAS) which the REITs are to observe the best practices for its management or operation aspects.

Being a REIT investor, you are part owner of the underlying property of the REIT. REITs are essentially like other stocks and are traded in the stock market where you can readily buy and sell your investment. From time to time, you will enjoy rental income in the form of dividends and over time may possibly get capital appreciation just like how bigger investors do it traditionally. 

REITs that are listed in Singapore are commonly known as S-REITS. S-REITs have been known to provide an average dividend yield of 5%-6% and can be seen to be attractive especially in this low interest rate environment that we are in.

Financing methods of REITs

At the start, a REIT would require an initial capital outlay. It can raise capital through equity or debt financing. If a REIT issues stocks to investors to get money, the funds collected would be Shareholder’s Equity. If a REIT borrows money with the promise to repay the loans to raise capital, these funds are known as liabilities. The funds raised from both debt and equity can then be used to purchase the real estate assets.

As a REIT operates, it is common for it to be distributing the majority of its taxable income and not hoarding much cash. A REIT usually retains only 10% of their generated income for its ongoing and future operational needs. Hence in order for the REITs to expand, REITs have to still rely on either equity or debt based financing to continue to expand. 

For equity financing, a REIT may issue new shares to the general investing public or to its existing unitholders through a rights issue. The disadvantage to existing unitholders is that if they do not take up the additional shares, their shareholding will be diluted.

REITs may also provide the option of allowing existing unitholders to receive their distribution in the form of a scrip dividend instead of cash so that it can retain more cash for expansion plans. Most often, the scrip dividends are issued at a slightly discounted share price to the existing unitholders.

For debt financing, a REIT may choose to borrow money from the banks through a secured or unsecured loan. If the loan is unsecured, the property assets are considered unencumbered assets. Usually REITs that are strong and promising will have a smaller percentage or none of their assets being encumbered or pledged to the bank. This is especially helpful so that in times of need, the REIT is free to sell the assets to repay the loan payments.

How do REITs expand?

Internal or external growth strategies can be looked at after the REIT secures new funding.  

For internal expansion strategy, a REIT can seek to either increase revenue or decrease cost or both. More property revenue can be collected by changing to higher yielding tenant mix or adjusting rental rates upwards. Asset Enhancement Initiatives can also be conducted to refurbish the current property to increase the amount of rentable area which will bring in more revenue as well.

For external expansion strategy, it usually involves acquiring new assets. With more assets in the portfolio, more rental income will be collected in the future. If the property that is acquired leads to an increase in Distribution Per Unit, the acquisition is said to be yield accretive.

What are the various types of REITs out there?

The very first Singapore REIT was launched in 2002 by CapitaLand Mall Trust. As of November 2021, we have more than 40 REITs and property trusts listed on the Singapore Exchange (SGX) with a market capitalization of close to $110 billion. This represents about 12% of Singapore’s whole equity market by market cap making Singapore the largest REIT market in Asia.

Different types of REITs have different underlying assets. They can be in the form of shopping malls, data centres, light industrial buildings, offices, hotels to even hospitals. Investors should understand the type of assets that they are invested in which differs in its expected yield and the opportunities and challenges they face. There are also diversified REITs that may hold real estate in more than one type of underlying assets. 

Let us cover the various types of REITs out there in Singapore:

Retail REITs

Two of the commonly known retail REITs that have shopping malls as their underlying asset include Frasers Centrepoint Trust and CapitaLand Integrated Commercial Trust (include office buildings as well). Most of the bigger shopping malls that are well located in Singapore would belong to either of these 2 REITs. 

One of the key things we look for in retail REITs is their Net Property Income. If the Net Property Income can increase over time, the value of the assets will appreciate over time. Hanging out and spending time (and money) in shopping malls are one of the favorite pastimes for people in Singapore due to the lack of other natural attractions that we see in larger countries. Barring extraordinary events like COVID, there is almost never a problem with footfall in shopping malls. 

When the tenants of the shopping malls thrive well, the REITs can grow organically by increasing the rental over time. This is made possible by tenants who especially prefer to remain at the same location due to their growing clientele base which makes them even more money than the rental increase comparatively. Another way would be through asset enhancement initiatives to enhance the yield of an existing space by adjusting the tenant mix. This can be seen by the replacement of more resilient tenants whose product or services have to be done in person as opposed to those that can be served by online e-commerce. On the other hand, retailers may also see technology as an enabler in creating a multi-dimensional touch point to draw consumers to their physical stores.

While some may feel that Singapore has been somewhat overcrowded with malls, the fact remains that the retail supply has been relatively modest and kept in check based on the demand as well. It is not uncommon to see suburban malls to be fully built only at a time where the catchment area is reasonable to support one by then. Coupled with the growth in spending power and increased presence of international brands flocking to open their stores in Singapore, the financial viability of retail malls remains very attractive.


Office/Commercial REITs

Office or Commercial REITs own office buildings or business parks such as the likes of Marina Bay Financial Centre, Mapletree Business City and OUE Downtown Office. Office REITs may have longer lease terms as businesses often prefer to have a permanent location for their operations which gives stability to the rental revenue.

As COVID-19 measures relax and more office workers return to their workplaces in 2022, office rentals may be poised to benefit from the increased demand. Office rentals have improved quarter on quarter towards the end of 2021 even with reasonable restrictions of work-from-office-cap of 50% back then. Singapore REITs that have significant exposure to office properties include Suntec REIT and Mapletree Commercial Trust.

While some form of hybrid working conditions might be here to stay after the pandemic, physical workplaces are still important to create the collaborative atmosphere and social interactions among employees, customers or business partners.

Financial services and technology companies provide an ongoing steady pipeline of demand for high quality office spaces in Singapore which in the long term can translate to improved earnings for office REITs. Being a major financial hub, it is likely that more Chinese and Indian tech companies will want to base their operations in Singapore over the next couple of years.

It is however worth noting that office REITs are of a much more cyclical nature and the timing of the investment can prove to be more important than other REITs. A long term investor must stay comfortable with the ups and downs of office REITs which are very sensitive to changes in the economy. During a recession, office assets can stay vacant for a long period of time which prompts investors to sell down office REITs heavily. Office buildings also require higher capital expenditure from time to time to stay updated and may need to take on additional debt.


Industrial REITs

Industrial REITs would cover assets such as light industrial buildings, flatted factories and data centres or industrial parks. Despite the economic disruptions in 2020 during COVID-19, the manufacturing sector expanded in 2021 and its future outlook remains favorable with economists projecting factory output growth to 4% in 2022.

Unlike retail REITs, tenants in these industrial properties would be sensitive to rental increase as rents form a more significant part of their operating expenses. For tenants that are affected severely, they may even scale down their operations. As such, the best way to grow for industrial REITs is through new acquisitions in order to increase its Net Property Income instead of pushing for rental revision upwards.

For example, Ascendas REIT which is Singapore’s first listed industrial REIT grew its Australian logistics portfolio in late 2020 by acquiring new warehouses where the increased demand for them has been underpinned by the growing e-commerce sector. Mapletree Logistics Trust did the same in 2021 to acquire a portfolio of 17 grade-A logistics assets in China, Vietnam and Japan. By enlarging their portfolio, it offers tenants a multi city network of warehouse facilities to grow quickly. Such acquisitions are typically expected to be accretive to distribution per unit (DPU) resulting in more dividend distributions for the shareholders overtime.

Both of the REITs mentioned above also have data centres in their portfolio. Data centres have also become one of the fastest growing asset classes with its increasing importance in this digital era, having physical buildings or spaces that house servers, computer systems and networks. In the year 2020, stocks with a data centre focus have been amongst the more defensive segments of the global stock markets. This is helped by the global lockdowns which have seen businesses accelerate their digital transformation during the pandemic.


Hospitality REITs

Hospitality REITs often combine a mix of hotels and service residences. As tourism tends to be even more cyclical than the other types of commercial real estate, this category of REIT is more suited for investors who are comfortable with the wild swings. This is because the demand for travel relies on disposable income which is affected by the economic cycles or affected by external shocks. This is especially evident when events like a global recession, SARS or COVID-19 can lead to sharp declines in visitor arrivals or possibly travel restrictions. To cushion against such shocks, trust managers may plan a two-tier lease kind of structure where there is a minimum amount of fixed rent on one end and another variable component based on the eventual performance of the operator.

Some of the bigger hospitality REITs like Ascott Residence Trust, boost an international portfolio and are not just concentrated in Singapore only. Ascott Residence Trust has a portfolio of more than 80 properties spread across 15 countries. To mitigate the drop in demand from leisure travelers, Ascott Residence Trust also looks to diversify its income stream by acquiring properties in the United States that focus on student’s accommodation.

On the other hand, Far East Hospitality Trust has a more concentrated portfolio and is the only pure play Singapore hospitality REIT. The attractiveness of our local hospitality comes from the bustling tourism in Singapore. Known for being a safe and clean city, Singapore boosted a record number of over 19 million visitor arrivals just before the 2020 pandemic hit. With top-notch facilities and infrastructure, it is no wonder that Singapore hosts many world class events and is consistently voted as a top MICE destination in the world. 

A key metric that helps to give us a good idea about the overall success of a hotel is the revenue per available room or REVPAR. The measurement is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate. It is the best measurement to judge the ability of a hotel to, in combination, to fill their hotel and fill it at the best possible price. It is about how effectively the hotel uses their inventory and the price they can charge given the quality of their assets.

Given more time, the pent-up demand for traveling is set to resume as global tourism reopens gradually and tourism might be back to its glory days. Hospitality REITs would then be able to post an uptick in REVPAR.


Healthcare REITs

Healthcare REITs own and manage healthcare-related properties such as general or specialized hospitals, medical centres or senior living facilities. In Singapore, there are only two listed healthcare REITs currently which are ParkwayLife REIT and First REIT. Healthcare properties are usually defensive and hold up during a recession as healthcare expenses tend to be more non-discretionary and give investors a reasonable steady stream of income.

Healthcare REITs often have a much longer master lease for the hospital operators of 10 years or longer. There is a good chance of lease renewal as there are high cost of relocation after spending on building the hospital infrastructure.

The quality of the underlying assets is important for the performance of a healthcare REIT. Generally speaking, a portfolio consisting of more hospitals compared to nursing homes should be preferred for a healthcare REIT investor. This is because the supply of good hospitals can be limited whereas a nursing home has lower barriers to entry. Hospitals need to be well managed with several reputable surgeons or doctors and have a high capital outlay. But a nursing home comparatively requires much less financial budget to build one and less specialized personnel.

The demand for healthcare services in Asia is expected to grow with the increasing population that gets wealthier and with the booming of medical tourism.

Learn how to build passive income in our upcoming live seminar.

What are dividends and when are they paid?

REITs, similar to listed companies, have a few choices when they make profits. Depending on their corporate goals and financial situation, they may choose to reinvest the money to help grow the business, buy back some of their shares on the stock market or to distribute earnings to shareholders as dividends. For Singapore REITs, to enjoy the tax exemptions, typically 90% of the taxable income are distributed to the shareholders.

To be entitled to the dividends, retail investors must be holding onto the shares before the ex-dividend date. If the stock is only purchased by a buyer on its ex-dividend date or after, the seller still gets the dividend.

What does dividend investing mean?

So for investing, dividend investing would mean to be investing in such companies that have a good track record of issuing dividends to their shareholders. It is the process of constructing an investment portfolio that aims to pay you a stream of income on a regular basis.

By having a portfolio of REITs, it means that essentially you are like the landlord collecting rental from the tenants. This is just like us playing a game of monopoly in real life where we are paid rental income passively as we roll the dice and time goes by. No matter where you are in the world or in the game of Monopoly, you can still collect rent that you are owed when there is a dividend payout.

For Singapore investors, we have an added advantage that the dividend income we receive from Singapore REITs are not taxable. Singapore practices a one-tier corporate tax system. This means that most companies would already be paying corporate income tax as an entity, and any dividends they declare for their shareholders are generally tax exempted. This is unlike when we invest for example in the U.S. markets, where our dividends are subjected to the U.S. withholding tax.

To learn more about the basics of dividends investing and how it works, you may watch this video.

What is distribution per unit (DPU)?

The distribution per unit is the amount of dividend paid from the distributable income to the unitholders for every share that they own. The absolute figure of DPU may not be very helpful in itself.

As REIT investors, we often want to see rising DPU for a REIT over the long term. This would mean that by holding the same number of shares, we are receiving more dividends year on year. We can calculate the DPU CAGR of a REIT to see the compounded annual growth rate of its distribution per unit over a given number of years with the formula below:

Mapletree Commercial Trust historical distributions per unit

In this example above, for Mapletree Commercial Trust, total distributions in cents was 9.530c for FY2021/2022 and 5.271c for FY2011/2012. Hence we have about 6.10% for the DPU CAGR over the last 10 years.

What is dividend yield?

When evaluating the potential income return from a stock, investors look at a company’s dividend yield.

For example, if let’s say that CapitaLand Integrated Commercial Trust is currently trading at $2 and the company is paying an annual dividend of $0.10 per share, then its dividend yield is 5% ($0.10/$2 x 100%). Dividend yield is calculated by using the annual dividends per share divided by the current share price. 

Hence, assuming if the amount of dividends per share remains the same, by this formula, if the share price drops and you buy the stock, the higher your yield will supposedly be. Conversely, if the price runs up further and you buy it, you should be expecting lower yield. Therefore the dividend yield that every investor gets differs, based on their own entry price. 

Dividend yield is just one of the several metrics a REIT investor should be looking at. There are also other key metrics that you may wish to watch out for when considering a dividend stock. You may find out more in this video.

How do REITs fit in an investment portfolio?

The frequency of dividend payments is often aligned with the announcement of company profits – typically quarterly, semi-annually, or annually. By owning a few different REITs where they pay out in different months of the year, one is able to construct a portfolio of different REITs and expect to receive dividends much often.

With a sizable portfolio constructed over time, these passive gains collected can potentially outweigh your living expense, where one can basically live off just with these regular ‘paychecks’ leading to financial independence. Watch this video to understand how you may do so.

Closing thoughts

It is no longer about pursuing the 5Cs or materialism in Singapore. These aspirations no longer resonate especially with the younger generations. While it may not be as easy as it looks, living the dividend dream and having financial security is now a dream shared by many Singaporeans and is the new 5C, as some may say. It is about being able to live comfortably within one’s means with passive income and having the freedom to do what one wants as early as possible. 

Understandably, for Singaporeans especially, our listed REITs have been heralded as a suitable investment for investors looking for a stable source of dividends.

For those readers out there who are serious in making this dream happen for you, you may also join our public telegram channel here where you may be kept in the loop when we share income investing related content or hold webinars on topics such as income investing with Singapore REITs.

We teach these income building strategies to our own parents and our students and they are using them to achieve the lifestyle they desire and being able to work less or retire earlier. If you would love to make a difference to your financial future and learn how to do it yourself, you may visit here to check on our upcoming workshops.

Leave a Reply