A Beginner's Guide to Key Ratios and Metrics for Investing in Singapore REITs

Sean Ng, Dealer

Sean Ng graduated from the National University of Singapore with a Bachelor’s degree in Business Administration with Honours (Specialisations in Accountancy and Finance).

He is passionate about investing and entrepreneurship and is interested in leveraging fintech to create exciting new financial solutions.

Real Estate Investment Trusts (REITs) are a popular choice for investors seeking steady income and potential capital appreciation. A REIT is a company that owns and operates income-generating real estate assets, providing investors an affordable way to diversify their portfolios with real estate. By pooling funds to acquire and lease properties, REITs redistribute at least 90% of their taxable income as dividends, making them attractive for passive income and potential capital appreciation.

Professionally managed by property managers and guided by dedicated REIT managers, these trusts ensure optimal occupancy and income generation. REITs are also liquid, transparent, and diversified, offering exposure to multiple properties across different locations.

In Singapore, REITs have become a cornerstone of many investment portfolios due to their ability to generate consistent dividend yields, often higher than traditional stocks or bonds. However, choosing the right REIT requires understanding specific financial ratios and metrics. This article highlights the key aspects and ratios beginners should evaluate before investing in Singapore REITs.

Singapore REITs (S-REITs) are publicly listed investment vehicles that own and manage income-producing real estate assets. These assets span various sectors from retail malls and office buildings to industrial parks and hotels. Investors primarily earn income through dividends, which are distributed from the rental income generated by the S-REIT’s properties.

Key characteristics of S-REITs include:

• High dividend payouts: S-REITs must distribute at least 90% of their taxable income to qualify for tax transparency
• Variety of sectors: Investors can choose from retail, healthcare, industrial, and hospitality REITs, among others
• Geographical diversification: Many S-REITs own properties overseas, offering exposure to international real estate markets

Some examples of S-REITs include Mapletree Pan Asia Commercial Trust (which owns Vivo City) and CapitaLand Integrated Commercial Trust (which has a stake in ).

Financial ratios provide a snapshot of a REIT’s financial health, performance, and sustainability. They help investors determine whether a REIT is undervalued, stable, or at risk of financial distress. Let’s explore the most important ratios for evaluating S-REITs:

Key Ratios and Metrics for Investing in S-REITs

a) Dividend Yield

Formula:

Dividend Yield = (Annual dividends per share/Price per share) * 100

• • Why it matters: The dividend yield indicates how much income you can expect relative to the current unit price. S-REITs are attractive for their stable yields
  • What to watch for: Compare a REIT’s yield with its peers and the industry average. A very high yield may signal risk, such as declining property values or unsustainable payouts. Nonetheless, it could also suggest a potential bargain

b) Price-to-Book Ratio (P/B Ratio)

Formula:

P/B Ratio = Price per share/Net asset value per share

• • Why it matters: This ratio measures how much investors are paying for each dollar of a REIT’s net assets. A P/B ratio below 1 suggests the REIT may be undervalued, while a ratio above 1 may indicate overvaluation
  • What to watch for: Look for REITs with a P/B ratio close to or below 1 but also consider other factors like future growth prospects and asset quality

c) Gearing Ratio (Leverage Ratio)

Formula:

Gearing Ratio = (Total debt/Total assets) * 100

• • Why it matters: The gearing ratio reflects a REIT’s debt level relative to its assets
  • What to watch for: A lower gearing ratio indicates reduced financial rise due to less reliance on debt. However, some debt can be beneficial if used to acquire high-quality, income-generating properties

d) Interest Coverage Ratio

Formula:

Interest Coverage Ratio = Net property income/Interest expense

• • Why it matters: This ratio measures a REIT’s ability to meet its interest payments. A higher ratio signals better financial stability
  • What to watch for: Look for REITs with a sustainable interest coverage ratio. A low ratio could indicate vulnerability to rising interest rates

e) Distribution Payout Ratio

Formula:

Distribution Payout Ratio = (Distributions paid to shareholders/Distributable income) * 100

• • Why it matters: This ratio shows the proportion of distributable income paid as dividends. While S-REITs must distribute at least 90% to maintain tax transparency, ratios significantly above this level may raise concerns about sustainability
  • What to watch for: Check if the REIT retains enough cash for operational needs and property enhancement

f) Net Property Income (NPI) Yield

Formula:

NPI Yield = (Net property income/Property valuation) * 100

• • Why it matters: The NPI yield measures how efficiently a REIT generates income from its properties. A higher yield suggests better asset management and rental income performance
  • What to watch for: Compare NPI yields across similar REITs to gauge operational efficiency

a) Sector Performance

Different REIT sectors perform differently depending on economic conditions. For example:

• Retail REITs may suffer during recessions but thrive during economic booms
• Industrial REITs often provide stable income due to long leases
• Hospitality REITs can be cyclical, depending on tourism trends

b) Geographical Diversification

Some S-REITs have properties overseas, offering exposure to different markets. While this can reduce risk through diversification, it also introduces foreign currency and geopolitical risks.

c) Management Quality

The REIT’s management team plays a crucial role in property acquisition, tenant relationships, and financial performance. Look for:

• Proven track records
• Clear growth strategies
• Transparent communication with investors

d) Economic and Interest Rate Environment

Source: Singapore Department of Statistics (DOS)

REITs are sensitive to interest rate changes. Rising interest rates can increase borrowing costs and reduce distributable income. On the other hand, low interest rates often boost REIT performance by lowering debt expenses and supporting property values.

• Chasing High Yields: High yields can be tempting but may signal underlying issues. Always investigate the sustainability of dividends
• Overlooking Debt Levels: High gearing ratios can expose REITs to financial stress during economic downturns

Stocks can be a great way to gain long term exposure to REITs. However, for those with a shorter term investment horizon, Contracts for Difference (CFDs) offer an effective way to trade REITs. When trading REIT CFDs, you speculate on the price movement of the REIT’s shares, either going long (buying) if you expect the price to rise or short (selling) if you anticipate a decline. One advantage of CFDs is the ability to use leverage, meaning you can gain exposure to larger positions with a smaller initial investment. However, leverage amplifies both gains and losses which makes risk management essential.

1. Do Your Research: Use the above ratios to evaluate potential REITs
2. Set Investment Goals: Determine whether you’re looking for income, growth, or both
3. Diversify Your Portfolio: Invest in multiple REITs across sectors and regions to spread risk
4. Use Reliable Platforms: Open a brokerage account that allows you to trade S-REITs

Singapore REITs offer an excellent opportunity for investors to earn passive income while diversifying their portfolios. By focusing on key ratios such as dividend yield, P/B ratio, gearing ratio, and NPI yield, beginners can make informed decisions and minimise risks. Remember to also consider sector trends, geographical exposure, and management quality. With careful analysis, S-REITs can be a rewarding addition to any investment portfolio.

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[1] https://www.vivocity.com.sg/about-us?about-vivocity

[2] https://tablebuilder.singstat.gov.sg/table/TS/M700071

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