PROPERTY

60 today Fri day February 24, 2012

tan Chin Keong
R
ecent newspaper articles
have increasingly laid
blame on real estate invest-
ment trusts (REITs) for the
rising occupancy costs in retail
and industrial properties.
In fact, in my earlier ar-
ticle in this newspaper titled
Hawker centres and REITs:
An inflation face-off? (Nov 25,
REITs: Both benefits and costs
CoMMentary
2011), I also highlighted that
REITs, in their relentless pursuit
of superior shareholder returns,
have generally been very proac-
tive and efficient in raising the
rental rates of their investment
properties. This is in the best
interests of REIT shareholders;
unfortunately, it also results
in higher rental costs, which
eventually filter through to the
inflation basket.
However, while poten-
tially resulting in higher in-
flation, REITs also have their
benefits. And having followed
the Singapore REIT sector since
its birth in 2002, I feel it is my
responsibility to also highlight
such benefits.
First, the introduction of
REITs has provided a cost-ef-
fective way for investors, espe-
cially the retail investors, to gain
exposure in a pool of diversified
commercial or industrial prop-
erties. Before REITs were intro-
duced, ordinary investors were
largely shut out of commercial
and industrial real estate due
to the generally large amount
of capital involved. REITs have
helped to attract retail money
into these previously inacces-
sible property sectors, thus ex-
panding the investment options
of ordinary Singaporeans.
This, in turn, has boosted
the supply of commercial and
industrial properties in Singa-
pore. Even if REITs mainly pur-
chase existing buildings from
property developers, they ef-
fectively free up capital in the
property developers, who then
gain the incentive to build new
commercial and industrial
buildings. In fact, many property
developers who are large REIT
sponsors in Singapore, have
been recycling the capital they
generate from the sales of their
investment properties to their
sponsored REITs to build new
retail properties. This helps to
create a more vibrant retail mall
scene in Singapore. One might
even say REITs have helped to
boost Singapores profile as a
tourist and commercial hub.
Second, REITs also help to
improve the quality of exist-
ing commercial and industrial
buildings. Due to their focus
on shareholder returns, REITs
are normally very active in en-
hancing the premises, facilities
and services of their investment
properties whenever the op-
portunity arises. This has result-
ed in better quality investment
properties (especially the retail
malls) that are more exciting to
visit. For example, many retail
malls (such as Plaza Singapura
and IMM Building) have been
successfully refurbished and
enhanced by their REIT owners.
Last but not least, the Sin-
gapore REIT sector was cre-
ated to provide an additional
high-yielding financial instru-
ment for Singaporeans to in-
vest their savings in order to
secure a steady income upon
retirement. This is especially
important given Singapores
ageing society. The sector has
developed well over the past
decade with more than 20 REITs
being listed currently, offering
investment opportunities into
different investment property
asset classes. In fact, the Sin-
gapore REIT sector is currently
the second-largest in Asia, just
behind Japan, another ageing
society.
Thus, like in most situa-
tions, the case for or against
REITs is not a straightforward
one as it entails both social and
financial benefits and costs. I
guess the key question is wheth-
er Singapore as a society values
the social and financial benefits
of REITs more than its costs.
Tan Chin Keong is an
analyst at UBS Wealth
Many retail
malls, such
as Plaza
Singapura,
have been
successfully
refurbished
and
enhanced by
their reit
owners.
blooMberg