What is a REIT?
REIT (Real Estate Investment Trust) is a type of security that invests in real estate through property, often on a stock exchange market. REITs usually comprise of commercial properties such as office space or malls which are let out. REITs were first introduced in US in the 1960s. There are 18 REITs listed on Bursa Malaysia. REITs allow you to invest in property without needing large capital investments nor the need to manage the property yourself. REITs are revalued annually & there is no need to calculate the REITs value yourself. One of the key things to look into is the dividend yield (among other factors).
A Comparison on REITs
Pros
- Increased liquidity (traded in stock exchange) compared to traditional properties.
- Diversification of properties which would normally be out of reach for the average investor.
- High dividend payout (in Malaysia, 90% of profits must be paid out as dividends annually).
Cons
- Overall returns are often lower compared to equities (estimated market rate +/- 2%).
- Economic downturns or certain property related events may cause an increase in vacant lots (decreased occupancy), thus lowering returns.
- Interest rate hikes may reduce REITs ability to repay or refinance loans causing non-payment of dividends or foreclosure of properties.
Types of REITs
- Hospitality
- Office retail
- Mall retail
- Health Care
- Industrial
Specialized REITs
- Islamic REITs invest only in properties where property tenants operate in businesses that comply with Sharia principles & the REIT fund itself is structured & run in a Sharia compliant manner.
- Stapled Securities are financial instruments where 2 or more securities are bound contractually to form a single unit which cannot be bought or sold separately.
What Should You Consider?
- Consider the properties that the REIT holds & its sectors which may perform differently
E.g. Mall retail may have capital appreciation if it is located in high demand price areas & renovation can enhance asset value as it would attract more shoppers
E.g. Healthcare is the least affected during times of recession but it has low capital appreciation
- Net Asset Value (NAV) should be at least 10% higher than their share prices (stock price undervalued)
- REITs that pay out at least 5% dividend yield after deducting tax
- Consistent growth in dividends per unit
- Low gearing; (borrowings) <40%
- REIT share price on uptrend
Should I Invest In Reits Or Directly Into Property?
While properties are one of the key portfolio holdings for long term wealth, REITs are an alternative to owning property. This may be when:
- Properties are too expensive
- Properties take up too much of your overall portfolio
Calculating REITs Returns
The primary factor in consideration for REITs is the dividend as a REIT must pay out 90% of profits.
Total returns from a REIT comes from:
- Dividends
- appreciation
Calculate the expected cash flow and qualify REITs that meet your investment returns criteria and are preferably growing. Consider REITs in a global perspective, not only confined to REITs in Malaysia for diversification and returns.
