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Broker's take: Schroders sees long-term returns from Singapore Reits

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INVESTORS seeking a sustainable income source should consider Singapore real estate investment trusts (S-Reits) as part of their investment portfolio, Schroders suggested on Wednesday.

Schroders said Reits had been a popular way for investors to invest in property while at the same time receiving an income. However, they have lost favour amid concerns over rising US interest rates. This was because as bond yields rise, the yield difference between a 'safer' bond and a more 'risky' income stock , narrows, making the latter less attractive.

"But if we take a look at longer-term performance and see how Reits in Singapore compare to the broader equity market, we can see that they could still have a role to play in investors' portfolios over longer time horizons and for anyone looking for a source of sustainable income,'' Schroders said.

For many S-Reits, dividends are paid out quarterly. Investors stand to reap long-term returns from reinvesting dividends earned back into the market.

"Utilising the power of compounding, the effect of dividends on overall performance is often understated,'' Schroders said.

It cited an example where the benchmark FTSE ST REIT Index (FTSREI) in Singapore has returned 19.7 per cent over five years on a purely price return basis versus the broader Straits Times Index's 3.2 per cent gain.

"However, if we take into account reinvested dividends and look at this in terms of total returns, then the FTSREI's numbers are that much stronger - returning just over 60 per cent over five years against a rather less impressive 19.2 per cent for the STI.''

The FTSREI's current dividend yield is also at an attractive level of 6.2 per cent against the STI's 3.5 per cent.

Schroders further argued that S-Reits also offer a dividend yield that still possesses a significant yield spread over the government's 10-year bond yield.

Patrick Brenner, Schroders' Head of Multi-Asset Investments in Asia, believes that Reits could be important component of an income-oriented strategy. However, he warned that it is a broad category and different sub-sector Reits behave differently in a market cycle.

"For example, Reits with a larger exposure to the consumer staples sector tend to perform better during a slowdown, while Reits with a bias towards the discretionary or industrials sector will more likely move in tandem with economic cycles.

"Therefore, it is important for investors to distinguish and understand the true exposure in their Reits holdings."