Some REITs have multiple leasehold properties in their portfolio which may raise a concern among investors, especially if the lease period is short. Industrial properties in particular have one of the shortest lease among all the other types of properties.
The land lease here refers to the lease given by the government to the owner for use of the property, usually 99 years for residential and commercial properties. Industrial properties have usually much lower leases than 99 years. After the 99 years are up or before that, the owners or developers will usually request for extension of the lease. The government can either extend the lease or take back the land if it needs it.
As mentioned above, industrial properties have shorter leases in general than other types of properties. There used to be leases of 99 years, then 60 years, then 45 years. Going forward, it seems like the government will be introducing industrial sites with shorter and shorter leases. Therefore, it also makes it harder for industrial REITs to recycle properties as new acquisitions will also have short leases.
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As the lease gets shorter, there is potential for the value of the property to drop. The REIT management will have to weigh consequences of allowing the property price to drop or forego the rental of the property by selling it. Active management of properties is essential and a good manager will not wait until the last moment before letting go of short lease properties.
In general, any non residential property with lease period exceeding 50 years are generally fine, so most commercial REITs and retail REITs don’t suffer from this leasehold problem at the moment. For industrial REITs, it is important to observe the overall leases left on the properties, in particular smaller cap industrial REITs. If in doubt, it is best to invest in retail and commercial REITs or select the largest cap industrial REIT Ascendas REIT.
About the Author
Calvin Yeo is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is an online financial planning platform. He is also a Chartered Financial Analyst (CFA) as well as Certified Financial Planner (CFP).
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