Adrian Chui, CEO of ESR-REIT’s manager, says the concept of capital return should be a consideration for the higher-yielding industrial assets. “Our long-term institutional investors look at total return, and they understand this concept of return of capital,” he adds.
If an asset gives a yield of 7% with a 20-year land lease tenure valued at $20 million, based on a back-of-the-envelope straight-line depreciation, the decay is 5% a year, he estimates. If the present value (PV) is 4%, the return investors get from the asset is likely to be 3%.
“If you are buying at 7%, 4% is basically a return of capital to yourself, because the value of the asset will be zero in 20 years. So what is the underlying yield?” says Chui. The answer is likely to be 7% less 4% or, in effect, 3%.
“In Japan, freehold property yield is at 4%. Net effect, the yield is about the same. But, retail investors factor in 7% because they are getting cash in the pocket,” Chui says. “Some investors may just see the 7%. They may not understand that actually you’re paying yourself via a capital return.”
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Let’s put this to the test. The risk of decaying land leases for pure-play Singapore industrial REITs is real. A hypothetical $100 million portfolio with a 25-year land tenure illustrates what happens over that period.
The cost of debt is 4.36% with a loan-to-value of 35%. In the view of some market observers, the valuation is aggressive.
Market watchers reckon that the assumption that the portfolio is ageing, with limited asset enhancement initiatives (AEIs) and 25 years of land lease left, should command a cash yield of at least 8%. This is, in their view, to compensate for the aggressive valuation through a higher yield. Most REITs use bullet loans, but our example looks at what happens with both a bullet loan and an amortising loan.
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The assumptions are:
Portfolio value: $100 million
Land tenure: 25 years
Debt: 35% ($35 million)
Cost of debt 4.36% or $1.526 million a year
Equity: 65% ($65 million)
Equity capital return: $2.6 million a year
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Equity cash yield: 8% or $5.2 million
Net operating income (NOI) for a year covers the required yield, the annual capital return and the cost of debt: $1.526 million + $2.6 million + $5.2 million equals $9.326 million. NOI yield is NOI divided by $100 million or 9.326%.
No change in discount rates, capitalisation rates and interest rates.
The net operating income needs to be able to cover the required cash yield, the annual equity capital return, and the annual debt cost. If a bullet loan is used, based on the decaying land lease, investors get back nothing in year 25, and they are left with the $35 million bullet loan at the end of the period. There is a need to sell the property well before the land tenure runs out.
Based on the bullet loan option, with an equity capital return of $2.6 million a year, the optimal time to divest the $100 million portfolio is when the land lease has around 10 years of run-in order to leave a cushion to pay back the loan.
In both cases, if investors do nothing but collect their yield during the 25 years, at the end of the period, when the equity capital value has run down to zero, they are left with a $35 million bullet loan. Any period below 10 years of land lease would prove a challenge for investors.
The assumption is that the equity capital return of $2.6 million a year and total land value return of $4 million a year are constant and comprise a larger portion of the residual land value as the land tenure decays.
Ideally, in the case of the bullet loan, the full capital value of the portfolio is used and depreciated over time to reflect the capital return, as investors won’t want to be left with the loan at the end of the period.
The best time to divest the portfolio is when it has 15 years of land tenure left.
What happens if the loan is paid down over 25 years? This allows investors more flexibility. Although the equity capital value runs down over time, by year 25, the loan has been fully repaid. But it would be prudent to divest the portfolio with between 15 years and 10 years of land lease remaining.
If the annual net operating income is maintained at $9.326 million (subject to interest rate and other fluctuations), investors would be in the money.
The initial model assumes a cash yield of 8% because of the ageing portfolio. With a capital return of 4% a year, the net yield is 4% for the portfolio.
The conclusion is that for an all-Singapore industrial portfolio, where investors believe they are receiving 8% a year, half of that is likely to be a return of capital.
REIT managers actively mitigate impact
Joshi says REIT managers are cognisant of decaying land tenures and have been actively managing their portfolios to mitigate the impact.
“One approach has been geographical diversification — acquiring assets in markets such as Australia, Europe or Japan where industrial land is often freehold or on significantly longer tenures. This helps improve the overall weighted average land lease profile of the portfolio.
“Another strategy is active capital recycling, where managers divest assets with shorter remaining land tenures and redeploy capital into properties with longer leases or stronger long-term fundamentals.
“A third pathway is redevelopment. In certain cases, JTC is open to granting fresh or extended leases if the asset is redeveloped into a higher-specification facility aligned with future economic needs, typically supported by a clear business case and tenant demand,” adds Joshi.
ESR-REIT has made use of all three strategies: it has acquired logistics assets in Australia and Japan; it has planned asset enhancement initiatives to upgrade properties with longer land leases; and it has a planned redevelopment.
Decaying land lease is specific to Singapore, where industrial land leases are generally granted for 20 to 30 years, compared to longer tenures in the past.
This reflects a deliberate policy approach, Joshi says. “In a land-scarce country, the government needs to retain flexibility to reallocate land to sectors that are most economically relevant over time, rather than locking it in for very long durations. For REITs, however, this creates a structural tension. REITs are long-duration income vehicles, and investors expect stability and visibility of cash flows,” she adds.
Land lease renewal
An example of a land lease renewal is Keppel DC REIT. In December 2025, it secured a 10-year land tenure lease extension for Keppel DC Singapore 7 and 8. The lease extension cost was $350 million, with an upfront land premium of $9.9 million. Keppel DC REIT sets aside funds from its distributable income for capex and upfront land premium.
REIT managers regularly liaise with JTC for lease extensions, which are considered on a case-by-case basis. JTC needs to approve of the tenant, and the REIT has to invest in the property to keep it up-to-date and relevant.
Elsewhere, CapitaLand Ascendas REIT’s (CLAR) annual report has a detailed breakdown of its portfolio. The weighted average land lease to expiry (excluding freehold properties) was 38.3 years; 75.3% of CLAR’s portfolio has a remaining land lease tenure of more than 30 years. CLAR’s portfolio, which was valued at $18.2 billion as at Dec 31, 2025, is large and diversified. This enables the REIT and its manager to curate a portfolio by employing AEIs, redevelopment, divestments and acquisitions to maintain the land tenure.
Although the Singapore dollar is a haven currency attracting fund inflows with a demand for Singapore-focused investments, investors should be made aware of the challenges of an all-Singapore industrial property portfolio.
This is why industrial REITs, including the recently listed UI Boustead Industrial REIT, have adopted the strategy of a diversified portfolio with a Singapore core, and a smattering of Japanese and/or Australian assets to alleviate the impact of decaying land leases.
