Singapore is a landlord country – almost everyone would say “if I have money I will buy properties and rent them out, so I can shake leg and collect rental income.”
Property prices have risen considerably over the past 55 years and with leverage, many Singaporeans have became wealthy through property ownership.
But properties require large capital outlay which not every investor would have the luxury to afford. Enter REITs, which could ‘fractionalise’ ownership into smaller amounts via units listed on the stock exchange. This enables investors with smaller capital to own a piece of real estate and not worry about maintaining properties and collecting rent. Also, some of the prized assets such as shopping malls are too expensive for an individual to own in entirety. Breaking down into REIT units makes it accessible even for a retail investor to invest in.
Singapore Exchange (SGX) sports one of the best places to list a REIT and there are close to 40 REITs, excluding the Hospitality Trusts, available for investors to choose from.
Mandated to distribute 90 per cent of the rental income as dividends, REITs often offer high dividend yields ranging from 5%-10% p.a. Coupled with the regularity of dividends, REITs are attractive to many investors and even for retirees who want the cash flow.
But REIT investors got a nasty shock with many REITs crashing more than 50% in just 7 days.
Given the Covid-19 situation, many businesses such as bars, clubs, tuition centres, and cinemas have closed. Restaurants and F&B outlets receive less patrons as measures have been tighten to reduce human traffic. Hotels have seen occupancy dropped to the teens. Office workers are working from home and office space are much less needed than before.
Tenants have put pressure on landlords and requested for rental relief.
Restaurant Association of Singapore (RAS) was one of the earliest entities to voice it on behalf of the tenants. The battle between tenants and landlords ensued, as reported by this Straits Times article:
The association had singled out CapitaLand for previously announcing rental rebates of 50 per cent but giving certain F&B outlets less than that.
In response, CapitaLand president for Singapore and international Jason Leow said it was “unfortunate that the entire relief package has not been fully comprehended by RAS, despite our ongoing engagements”.
The Covid-19 situation has worsened with increased number of cases that were unlinked. It meant that the untraced infected people are out there in the streets. The call for stronger measures would deteriorate the economy of Singapore, but necessary to save lives.
To relieve the impact to the economy, the Singapore government decided to dip into our national reserves kitty and provide financial aids to businesses and households. Together with the earlier announced budget, the government would spend S$55 billion or equivalent to 11% of the GDP.
Pertaining to property related matters, property tax rebates would be extended to non-residential properties and rental waivers for tenants at properties under the government.
DPM Heng Swee Keat has emphasised that he expected the landlords to pass on the tax rebates fully to the tenants.
It seems like landlords are dragging their feet such that DPM Heng has hinted it might be put into law to force landlords to pass on the property tax rebates to the tenants. The government is pretty fast to act and a temporary bill will be tabled to Parliament next week regarding contractual obligations.
This would mean that REITs are going to lower rents for tenants and unitholders would receive lower dividends as a result.
SPH REIT has just cut dividends by 77% compared to the previous quarter despite an increase in distributable income by 12%.
This is a rude shock for investors who rely on the dividends for income and definitely would make some of them unhappy.
SPH REIT has announced that they will fully pass on the rebates to the tenants. They are doing even more, providing rental rebates of up to 50 per cent of base rent on the most hit tenants. This scheme will be extended till end of May.
Hence, SPH REIT is cutting the dividends and keeping the cash for the Trust to operate while collecting less income from the tenants.
My question is that is two months sufficient? What if the virus situation is still bad thereafter and REITs may indefinitely cut the dividends.
Is it fair to REITs unitholders to continually support the tenants? It is not an easy question to answer.
If you are rich enough, receiving a lower dividend would not affect your life and you have the capacity to help the tenants.
What if you are retired and rely on the dividends for cash flow? Would it be unfair if you take a big dividend cut that would threaten your livelihood?
One can argue that investing in stocks and REITs has risks and this is time where investors should bear those risks. But we can also turn it the other way and said that the tenants are business owners and they too must take the risks for such bad events to happen.
The most common argument is that tenants must be helped because if they don’t survive, the landlords would have empty units and lower rents anyway. But how do we also prevent less-affected tenants to take advantage of rent cuts?
The problem is that we cannot even agree on the principles to help or not to help. And if it is to help, where to draw the line?
What do you think? Vote below and leave a comment to explain your stance.
Read more about 7 REITs Reported Results For The COVID-19 Period And A Few Have Withheld Dividends.
Hi Alvin,
Thanks for the writeup. Personally I think as a shareholder, it’s good to give and take, when times are good we enjoy an increase in dividend to benefit from the upward rental reversion or improvement in sales. But in bad times, we got to share the burden as well.
Though SPH reit sees an increase in NPI, isit possible for SPH Reit to keep the cash? because I know that Reit are entitled to distribute 90% of dividends to shareholders to enjoy favorable tax treatments.
90% of NPI is on an annual basis. So they can give less this quarter and subsequently give more later. Probably they expect losses in future quarters and the cash would come in handy and the net distributable income will reduce anyway
Thanks for the explanation Alvin. Has SPH REIT announced that they will subsequently give more later?
No. It could also be a case that they expect losses in future quarters. So the distributable income for the whole year will drop and maybe no longer need to give more still may hit the 90% mark.
Property tax rebates theoretically are extra bonuses for the REITs / landlords … which the govt has been strongly “recommending” to be given most or all to the tenants. Govt sacrifice by giving up this tax revenue.
Some Reits / landlords have withheld significant portions of the “rental rebates”, as “extra cash buffers” as everybody & their dog knows rents & reversions are going to drop big, and access to credit will become harder as the recession gets worse.
Of course tenants are not happy & have used the 2 Budget Speeches to complain to the govt.
Hence now govt step in to create laws to make Reits / landlords pass on 100% of the property tax rebates to the tenants.
Of course now the tenants have to do their part to hang on to their employees, using all the other various Budget measures such as the 50% salary support for F&B.
Else employees & ex-employees of these tenants will complain to MOM. LOL.
In election year govt is VERY sensitive to mass firings & mass retrenchments. Although sure will have, but govt trying to mitigate & also appear publicly to help.
In my opinion, any rent-seeking behavior is always wrong.
Simple reason: Rent-seeking in itself, generates and add no value to the economy.
In the long term, it simply transfer value from one party to another and if goes unchecked, usually the powers tilts towards one direction (the landlords) , in the process, extracting all available value from the business entity operating the premise.
Rent seeking behaviour is not wrong. Property Managers are incentivized to keep the property up to date and create a pleasant tenant/customer experience. If every business owned their shop unit, they will not be inclined to take care of matters outside of their own shop space. Issues like tenant mix, cleanliness of bathrooms, parking space, sheltered walkways, promotional events are essential to create a positive customer experience that brings back customers.
It is also not a transfer of value from one party to another. A good location will benefit the tenant in more ways than one through obviously better business and higher brand visibility which cannot simply be measured in dollars over the short run. If you look around, there are tenants that have been in the same location for years some even more than a decade. Obviously the relationship is tilted to a win win situation, otherwise either party would have not continued the rental agreement.
What will happen to the Reit if the whole year pay-out is less than 90%? Just to pay a higher tax?
Also, it is true that landlord is not allowed to claim back the outstanding rent if its tenant go bankrupt after the given deferred period?
Yes, my understanding is that the payout of less than 90% would mean they have to pay tax, not higher tax, on their earnings.
The rent is deferred but must be paid in full eventually. The landlord can go after the tenant legally. But if the tenant couldn’t pay, the landlord would have to write it off.