Extracting Land Dividend from Retail, Commercial, & Industrial Properties Through REITs

By the turn of the century, with public housing prices already reaching it ‘optimal’ affordability level, systemic rent-seeking efforts by the 3G Government to extract wealth from rising land value now gravitated from public housing towards retail, commercial and industrial properties using real-estate investment trusts (REITs) as the vehicle of rent extraction.

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11 September 2019

As mentioned, after the turn of the century, as growth slowed with demographic dividend dissipating, economic development appears to focus progressively more on wealth generation leveraging on the growing land dividend. Efforts by the State to extract the growing land dividend began as early as the late 1980s when the 2G Government began to re-position public housing as an investment asset to justify the rapid price increases. By the turn of the century, with public housing prices already reaching it ‘optimal’ affordability level, systemic rent-seeking efforts by the 3G Government to extract wealth from rising land value now gravitated from public housing towards retail, commercial and industrial properties using real-estate investment trusts (REITs) as the vehicle of rent extraction.

What are Real-Estate Investment Trusts?

To put simply, REITs are companies that own and operate properties and receive rental income from their tenants. They are listed as Unit Trusts traded in the stock market like any other stock. When a REIT investor or unit holder buys a unit, he is actually buying a share in the underlying property of the REIT (for example, shopping malls). REITs are therefore a much more liquid investment as compared to physical property. REIT investors benefit through regular dividend payments (from rentals paid by tenants) and can also enjoy share price appreciation (i.e. capital gain) similar to any other stock.[1]


Depending on the type of properties they own, REITS can be categorized into the following six types:

  • Retail REITs: These are REITs that have shopping malls as their underlying asset. Not all malls are owned by REITs. There are two types of mall ownership: strata-titled and single ownership. Strata-titled malls do not have a single owner. They are collectively managed by individual shop owners. Examples of strata-titled malls are Lucky Plaza, Sim Lim Square and Far East Plaza. Single ownership malls, as the name suggests, are owned by one single owner. They can be REIT-managed such as Tampines Mall and Junction 8 or non-REIT managed such as 313@ Somerset and Parkway Parade.

  • Office REITs: These are REITs that own office buildings. Most of the office space today is taken up by the more than 7,000 multinational companies (MNCs) headquartered here. Local businesses occupied only a very small proportion of the office stock available.

  • Industrial REITs: These are REITs owning industrial building including flatted factories, warehouses, high specification industrial buildings and business parks. Flatted factories are where most of Singapore's manufacturing SMEs operate from, while business parks house many of the non-customer facing operations of MNCs such as Samsung, Nike and IBM. Most of the REIT listings after the 2008-2009 financial crisis were industrial REITs such as Cache Logistics Trust, Sabana REIT and Mapletree Industrial Trust. Several acquired properties from from Jurong Town Corporation (JTC) (e.g. Mapletree Industrial Trust acquired more than 60 properties from JTC in 2008 and packaged them as a REIT in 2011, with a mark-up).

  • Hospitality trusts: These are either hotel REITs (e.g.  CDL Hospitality Trusts) or serviced residence REITs (e.g. Ascott REIT). Unlike offices and retail with their three-year leases, the hotel business is relatively more volatile. For example, room occupancy rates plunge during outbreaks of SARS and bird flu and terrorist attacks. The sector attracts not only leisure tourists. Around 25%-30% of visitors come to Singapore for MICE-related (meetings, incentives, conferences and exhibitions) activities. Today, Singapore is the top global cities for the hosting of MICE events.

  • Healthcare REITs: These are REITs that have hospitals and nursing homes as their underlying assets.

  • Data Centre (DC) REITs: These are REITs owning properties that are built to be data centres. In Singapore, there is only one DC REIT owned by Keppel.


The six types of REITs are owners of a wide range of non-residential properties in all sectors of Singapore’s economy.


The idea of REITs was first conceived in the US in the 1960s but it was not until the US commercial real estate bust of the early 1990s that REITs really took off. Banks then were burdened with a large amount of real estate loans in their books. This led to a fire sale of commercial assets which the US REITs snatched at depressed prices.


Similarly, Singapore’s REITs emerged during the property market slump in the aftermath of the Asian Financial Crisis. The first attempt to launch a REIT was made by one of Singapore's leading property developers, CapitaLand, in November 2001. However, the REIT, called SingMall Property Trust, was poorly received due to low yield and poor outlook for the retail and general property market and the initial public offering (IPO) was withdrawn. In July 2002, the REIT was re-launched as CapitaMall Trust (CMT) offering a higher yield of 7.06%. This time, the IPO was a resounding success and was five times oversubscribed.

Growth of S-REIT Market in Singapore

After the successful IPO of CMT, other Singapore REITs (S-REITs) such as Ascendas, Suntec and CapitaLand Commercial Trust (CCT) soon also followed. As the market gradually overcame its initial scepticism about this new investment class, S-REITs underwent a strong bull market between 2002 and 2007 even though the general real estate market then was still in the doldrums, the economy was in the midst of the dot-com crisis and the stock market was lethargic. Across the market, REITs suddenly morphed from yield investments to hot growth stocks.


For the unit holders, the rising popularity of REITs was driven by high yield, tax benefits and risk diversification. Because REITs are required to distribute at least 90% of their income to unit holders, most of the profits they make ends up in the pockets of the unit holders as dividend. Most Singapore REITs, for example, provide yield from 5% to 9%. This is much higher than the 2% - 3% interest banks pay for fixed deposits. Moreover, as property owners, investors not only pay property tax but are also taxed on their rental income. In contrast, the dividends from REITs are fully tax-exempt. Finally, REITs also helps investors to diversify risks. For example, an investor who buys 1,000 units of a REIT like CMT owns a share in the more than 15 malls and 2,500 tenant leases that CMT owns. The risk is significantly lower than owning a single condominium unit and depending on a single tenant for rental income, not to mention also the financial risk associated with the huge loans needed to finance the purchase of the property.


For the REITs, their growth was driven by two main factors. The first was the availability and reasonable pricing of commercial real estate. The Singapore real estate market from 2002 to 2005 was in the process of bottoming out after a prolonged bear market following the Asian Financial crisis in 1998. Many high-quality assets such as the Junction 8 mall and the IMM building were available for sale at reasonable prices. The second factor was the low cost of funding. Because of the low SIBOR of about 1.26% and the availability of a new source of financing called commercial mortgage-based securities (CMBS), high-quality REITs such as CMT, CCT and Ascendas were able to raise funding at below 3%.


This combination of a weak property market coupled with low financing cost led to some very profitable opportunities for the REITs. CMT, for example, quadrupled its asset base from only three properties worth S$900 million at IPO to 13 properties worth S$4 billion within a span of four years. These acquisitions were highly yield-accretive and CMT share price soon also rose.


The bull market for S-REITs peaked around mid- to late-2007 just as the subprime crisis in the US was breaking out. As the CMBS market froze, capital market funding of REITs was cut off and the REITs had to approach banks to refinance the maturing CMBS loans. Meanwhile, the real economy was also slowing down and the REITs were hit with lower rental incomes and higher vacancy rates.


By early 2009, the market was pricing in a bankruptcy for many REITs and investors began selling even though the yields of many excellent REITs went up to double-digit because of the falling share price. But the REITs proved to be much more resilient than initially thought. Many had high-quality properties in good locations and with a proven ability to generate cash through good and bad times. During the crisis, not a single major S-REIT suspended its dividend payments.  Neither were there forced liquidations or bankruptcies. By mid-2009, the panic selling stop.


By 2012, barely a decade from CMT’s launch in 2002, Singapore’s REIT market grew to become the third largest in the Asia Pacific region after Australia and Japan with 27 REITs and a market capitalization of around S$40 billion.

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[1] See Bobby Jayaraman. (2012). "Building wealth through REITs." Marshall Cavendish. Note: This writing on REITs market development summarizes Bobby Jayaraman's informative and insightful writing on the topic.