The Beginner’s Guide to Investment Products – REITs and CPF Investments

Real Estate Investment Trusts (REITs) are a type of unit trust, in which the underlying asset is property. REITs manage and rent out various properties, and income from the rental is paid to its shareholders as dividends.

A REIT purchases its properties from developers, through equity raised by shareholders. REITs do not pay for this property in full; they borrow money to purchase it.

The ratio of a REIT’s equity to its debt is called its gearing, and this is capped at 35% or 60% (depending on the REITs credit rating). Gearing is one factor in evaluating the risk of a REIT.

REITs are run by appointed REIT managers. These people make guiding decisions for the REIT, such as which properties to add to a REIT, which assets to sell off, etc.

Besides the REIT managers, REITs also employ property managers, who try to maximize rental yields. It’s the job of property managers to conduct asset enhancement initiatives, such as redesigning floors to hold more stores, finding the right mix of tenants, etc.

As such, a REITs value and performance are dependent on the competence of its managers.

REITs tend to specialize in specific types of property. For example, CapitaMall Trust is a retail REIT (they manage malls) whereas Ascendas REIT handles office and industrial properties*.

Besides its management, a REIT is also gauged on the quality of its assets (owning a mall in town is probably worth more than owning a few scattered shop houses).

*Performance patterns based on specific types of REITs (hospitality, retail, office, and industrial) are beyond the scope of a beginner’s guide. Consult your financial advisor or broker.

 

Divident Payouts

REITs dividend payouts can occur every six months, or quarterly. Payouts are calculated via Distribution per Unit (DPU) and yield.

DPUs measure how much an investor gets for every share she has in the REIT. If the DPU is $0.0361 per share, for example, you would get ($0.0361 x 1,000) = $36.10 per lot of 1,000 shares.

You can check DPUs for various REITs on the SGX portal.

There are different ways of calculating a REIT’s yield. The standard method is to take the latest DPU for one year, and divide it by the share price.

For example, say my REIT’s latest DPU was $0.0361. I receive a payout every six months, so over one year, I would get an annualized DPU of ($0.0361 x 2) = $0.0722

I see that the latest share price is $1.02 per share. So my yield would be ($0.0722 / $1.02) = Approx. 7.07%

The typical yield for REITs is between 5% to 9%, but this is not a guaranteed figure.

 

How Much Do REITs Cost?

REITs are bought and sold like shares. The given price of a REIT is the price per share (or per unit) in the REIT. These are sold in lots of 1,000.

So if a REIT has a listed price of $1.32, that means the minimum purchase would be ($1.32 x 1,000 = $1,320).

 

Using Your CPF to Investment

You don’t always have to use cash for these investments..

If you are 18 or above, and not an undischarged bankrupt, you might be able to use the CPF Investment Scheme (CPFIS) instead. You will need:

  • Above $20,000 in your Ordinary Account (OA) for CPFIS-OA investments
  • Above $40,000 in your Special Account (SA) for CPFIS-SA investments

Before investing your CPF money, note that you earn an extra 1% interest on the first $60,000 in your combined CPF accounts.

The amount you can invest is a percentage of your investible savings. This is the sum of your OA balance,including any CPF funds you have withdrawn for investment and education.

Up to 35% of investible savings can be put in:

  • Shares
  • REITs
  • Corporate Bonds

Up to 10% of investible savings can be put into gold Exchange Traded Funds (ETFs), or other gold products.

There are also restrictions on which specific products you can invest in. These are mainly based on the risk level of the products. For more details, check with your broker (the list is updated regularly).

Returns from your investment will go into your CPFIS account. From there they can either be invested again, or placed in your CPF.

Assuming you meet the minimum sum and Medisave requirements, you can request to withdraw the money you make (and any investments) under CPFIS at the age of 55.

 

What are the Costs and Risks?

Here are standard fees to be paid for CPF investments. These are mostly the same fees you pay when investing with cash.

On the upside, you do not have to top up your CPF if the investments fall in value. So if you buy shares with your CPF, and those shares plummet, you are not required to replace the difference.

However, investments made under CPFIS are in no way safer or guaranteed. Losses incurred by your CPF investments will not be replaced for you.

 

How Do I Start Investing My CPF Money?

If you are using your OA funds, you will need to open a CPF investment account with one of the three agent banks:

  • DBS / POSB
  • OCBC
  • UOB

You don’t need a CPF investment account if you are using your SA funds.

To purchase or sell products under CPFIS, approach your broker or the organizations offering the products.