If you have been noticing that your regular grocery bill in Singapore has gotten a little steeper, rest assured, it is not just you.
Inflation in Singapore surged to a 14-year high of 5.5% earlier this year before moderating slightly to 4.2% in June.
Inflation has a way of nibbling at the purchasing power of your money, as it results in a sustained increase in the prices of goods and services.
With interest rates also on an upward trajectory over the past 18 months, mortgages have become more expensive as Singapore banks adjust their loan rates.
Stashing your money in a bank may seem like the safe thing to do, but the interest rates that the big banks in Singapore offer might not be enough to outpace inflation.
If you are looking for an alternative that can protect your investment against inflation and provide a steady stream of income, consider investing in or buying shares of Real Estate Investment Trusts, better known as REITs.
This asset class is particularly attractive for Singapore investors seeking a dependable source of passive income, as dividends in the city state are tax free.
Here are five reasons why REITs can be a great way to invest for income amid inflationary pressure and rising rates.
1. Reliable dividends
Singapore-listed REITs have a portfolio of property assets managed professionally by a REIT manager.
They are required to pay out at least 90% of their net profit as distributions to enjoy tax benefits.
This makes REITs a dependable source of dividends, as they are required to pay out regular distributions.
If you’re a salaried employee, owning REITs means you can enjoy an additional layer of passive income to help with rising expenses.
If you’re retired, the regular distributions can act as a source of income that replaces active income, allowing you to maintain your lifestyle.
2. Diversification of investment portfolio
REITs listed on the SGX provide an excellent way to diversify your investment portfolio.
Singapore REITs have assets that span across various property sectors, including commercial, industrial, retail, healthcare, and hospitality, as well as across countries and continents.
By investing in REITs, you gain exposure to multiple types of real estate in different regions, which can help to reduce risk through diversification.
As economic conditions change, different sectors may perform better than others, and having a diversified Singapore REIT portfolio can help to balance out returns and provide some protection against market volatility.
This diversification can be particularly valuable for new investors looking to spread their risk while exploring the world of real estate investing.
3. Capital appreciation potential
In addition to receiving regular distributions from Singapore REITs, investors can also benefit from potential capital appreciation over time.
As property markets improve and the value of properties within the REITs’ portfolio increases, the net asset value (NAV) of the REITs may also rise.
This can result in higher unit prices and capital gains for Singapore-based investors who choose to sell their units at a profit.
This capital appreciation potential adds another layer of potential returns on top of the steady income from distributions, making REITs an attractive investment option for both new and seasoned investors.
4. High dividend yields
REITs are attractive because they offer distribution, or dividend, yields that can exceed the inflation rate.
It is important, however, to check whether each REIT’s distribution per unit (DPU) is sustainable going forward and not just relying on its distribution yield as a deciding factor.
Look for REITs with strong sponsors that can support them through tough times and provide them with a pipeline of potential assets for acquisition in the future.
5. Potential growth through acquisitions and asset enhancements
The best part of a Singapore REIT is that its DPU can continue to grow over time.
The REIT manager can achieve this growth through organic growth and/or acquisitions.
With a growing DPU, your level of passive income can also steadily increase over time.
By owning REITs that grow their DPU consistently through various methods, you can collect more money in your bank account over time.
To maximise your returns, you can reinvest your distributions back into the same REITs, allowing your passive income stream to increase even faster.
REITs deserve a place in your investment portfolio
In conclusion, the evidence is clear: Singapore REITs deserve a place in your investment portfolio.
They offer dependable distributions and yields higher than the inflation rate, and well-managed REITs can grow their asset base and DPU over time.
All this makes them a great investment choice for dividend-seeking investors.
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Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
