Real estate investment trusts (REITs) are a long-time favourite among income investors. REITs typically pay a relatively high and stable dividend as they must distribute 90% of their income to unitholders. At the same time, REITs are also a leveraged instrument; they will typically employ a certain level of debt to purchase property. In Singapore, a REIT is allowed to borrow up to 50% of its property portfolio value. But with debt comes risk. The more debt a REIT has, the riskier it becomes. A REIT must be able to service its interest payments and loan obligations on time in order to avoid a default. In recent years, there have been examples of REITs defaulting on their loans and suspended from trading. However, with interest rates rising in an inflationary environment now, is it still wise to invest in REITs?
