The following are just some examples of risk factors and are not meant to be exhaustive. Please refer to prospectuses or offering documents issued by the relevant S-REIT for details.
Just like any publicly-traded product on stock exchanges, S-REIT prices are subject to demand and supply conditions. There is a risk that investors will receive less than the original amount invested when they sell their units in a S-REIT. Such prices generally reflect investor confidence and sentiment about the property market and its returns, the REITs’ management, interest rates, and other related factors.
In the event that a S-REIT reports an operating loss due to, for example, occupancy rates falling substantially, distributions to unitholders may be reduced. Investors should therefore consider if the S-REIT has taken any risk-mitigating measures relating to tenancy agreements such as procuring upfront payment or contractual lock-ins of rental rates. The S-REIT’s capital structure could contribute to income risk as well, where a higher cost of debt could reduce the income distributions to unit holders.
Investors are exposed to greater risk of loss if a significant portion of the value of the S-REIT’s assets is dependent on only one or a few properties, or if the S-REIT depends on only a few tenants for a majority of its lease income.
Investors should consider the capital structure of the S-REIT. Where a S-REIT uses a large amount of debt to finance the acquisition of properties, there is increased leverage risk. In the event of an insolvency, the assets of the S-REIT will be liquidated and used to pay off creditors first. The remaining value, if any, will then be distributed to unit holders. Investors therefore face the risk of receiving less-than-expected amounts, or none at all. The Monetary Authority of Singapore imposes an aggregate leverage limit of 45% on all S-REITs.
S-REITs may enter into new borrowing agreements or issue new bonds to repay existing loans. This gives rise to the risk that the terms of such refinancing undertaken will be less favourable than the terms of the original borrowings. If a S-REIT is unable to secure refinancing, it may be required to sell off some properties if they are mortgaged under the loan. These risks could affect the unit price and income distribution of a S-REIT.
Certain S-REITs may offer diversification benefits based on the type of properties or region they invest in, but such diversification could carry other risks such as sector, country regulation and political risks as well.