REITs With Overseas Properties: Yay or Nay?

Mapletree North Asia Commercial Trust and Eagle Hospitality Trust, two REITs that are listed in Singapore with overseas assets, have been in the news for all the wrong reasons. 

If you are not familiar, Festival Walk, one of Mapletree North Asia Commercial Trust’s key assets in Hong Kong, was vandalised by protesters earlier this week. Meanwhile Eagle Hospitality Trust is at risk of losing one of its key assets, The Queen Mary, due to actions from its sponsor. 

Both REITs have seen their unit prices fall considerably when the respective news broke.

The predicament that the two REITs are in has shone some light on the risks involved with investing in REITs with overseas properties. As such, I thought it is an opportune time to discuss some of the advantages and risks of investing in this asset sub-class.

The Positives

Let’s start with the main reasons why investors may want to invest in these REITs. 

Diversification

The most important advantage is REITs with overseas portfolios give investors the chance to gain exposure to a different geographical market. This gives investors the opportunity to participate in economies that could be faster-growing than Singapore’s. It also helps to diversify your portfolio away from Singapore.

Higher yields

REITs with overseas portfolios tend to trade at a discount to REITs with predominantly local portfolios. It is common to find that REITs with overseas properties have much higher yields, offering the potential for better returns.

The downside

While there is the possibility of higher returns, investors also need to be familiar with the downsides and risks.

Withholding taxes

Certain countries have a withholding tax law. This means that cash sent back to shareholders in Singapore end up being taxed, which reduces the REIT’s distributable income.

EC World REIT, for instance, has had to pay a withholding tax to authorities when they repatriated income to Singapore.

Currency fluctuations

If you want to receive your distribution in Singapore dollars, you may have to contend with currency fluctuations. REITs with overseas properties tend to collect rent in the local currency. As such, if the currency depreciates against the Singapore dollar, you may be left with a lower distribution.

Ascendas India Trust is a good example. The steep depreciation of the Indian Rupee has had a big impact on the REIT’s Singapore-dollar-denominated distributions.

Political environment

Singapore enjoys a relatively stable political climate. We tend to take the peace of our country for granted. However, this may not be the case for other countries.

Right now, Hong Kong is facing a major political crisis with protests stretching for more than six months.

As mentioned, earlier this week, Mapletree North Asia Commercial Trust saw its share price stumble after protestors vandalised Festival Walk and set fire to the Christmas tree in the mall. As Festival Walk contributed more than 60% of the REIT’s revenue in 2018, the REIT’s rental income could drop.

Difficulty assessing the quality of the properties

It is easy to visit a shopping mall in Singapore to assess the crowd and the tenants. However, assessing the quality of overseas properties is much more challenging. 

Investors who are unwilling to go down to physically examine a REIT’s portfolio will have to rely on annual reports and the details of the property in the company’s quarterly filings.

REITs with overseas properties: Yay?

Knowing both the pros and risks, the question now is whether it is still worth investing in REITs with overseas portfolios? 

I think the answer is yes!

Despite the recent mishap at Mapletree North Asia Commercial Trust and Eagle Hospitality Trust, the potential for a higher return is too good to ignore. The market is currently very apprehensive of such REITs and has generally priced them at a large discount to their peers. The price mismatch has created an opportunity for more yield-hungry investors.

Don’t let the two recent sagas deter you. I believe many REITs with overseas properties, despite the risks, are likely to continue dishing out stable dividends and will continue to provide investors with great long-term returns.

We can also reduce risk by choosing the REITs within this sub-class that have more favourable characteristics. If we do our research and diversify sufficiently, I think it is still a good idea to have REITs with overseas properties in your investment portfolio.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.