Investing in Real Estate Investment Trusts
Last updated: Aug 12, 2019
What is a REIT?
REIT is a security that invests in real estate through property often on a stock exchange market. REIT usually comprise of commercial properties such as office space or malls which are let out.
REITs was first introduced in US in the 1960s and in Malaysia in 2005.
REITs allow one 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 (in combination with other factors – not in isolation).
- Malaysia: 18 REITs listed on Bursa Malaysia (M-REITs).
- Singapore: 39 REITs listed on SGX (S-REITs).
- Hong Kong: 11 REITs listed on HK Ex (H-REITs).
- Australia: 38 REITs listed on ASX All Ordinaries Index (A-REITs).
- Japan: 46 REITs listed on Tokyo Stock Exchange (J-REITs).
A Comparison on REITs
- Increased liquidity to trade (in stock exchange) compared to traditional properties
- Diversification for properties which would normally be out of reach for the average investor
- High dividend payout (in Malaysia 90% of profits each year must be paid out as dividends)
In 2016 was announced REITs ruling change to allow purchase & development of properties in Malaysia up to 15% of the overall portfolio which is good news for REITs especially those with a developer or construction links.
- Overall returns are often lower compared to equities (est. market rate +/- 2%)
- Economic downturns or particular property related events may cause increase in vacant lots (decreased occupancy %) lowering returns
- Interest rate hikes may reduce may decrease REITs ability to repay or refinance loans causing non-payment of dividends or leading up to foreclosure of properties
Types of REITs
- Health Care
- Retail focused
- Industrial focused
- Office focused
Other Specialized REIT Classifications
- Islamic REIT: Invest only in properties in which property tenants operate in businesses that comply with Sharia principles & REIT fund itself structured & run in Syariah compliant manner.
- Stapled Securities: A type of financial instrument where 2 or more securities are bound contractually to form a single unit which cannot be bought or sold separately.
Investing in REITs
- Dividend yield
- Premium/discount to NAV
- Leverage Ratio
- Distribution CAGR growth
- Total return
- Yield spread
- Type of property/sector
- Management team
- Growth strategies
- Financial structure
- Governance & transparency
- Equity risk
- Interest rate risk
- Management risk
- Business risk
- Policy & regulatory risk
What REITs to Consider?
- Consider the properties that the REIT holds & its sector as different performance
E.g. Mall retail can have capital appreciation if in demand price areas & renovation can enhance asset value as more shoppers
E.g. Healthcare least affected during times of recession but has low capital appreciation
- Net Asset Value (NAV) 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 (DPU)
- 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 is an alternative to owning property. This may be when:
- Properties are too expensive
- Properties make up too large a % 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:
- Price 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.
REITs on Bursa Malaysia
- Malaysian REITs (reitdata.com)
- MyPF 5 REITs Fundamentals Analysis (members)
- REITs Market Insight (premier)
- Review of Malaysian REITs (premier)
Share & discuss on REITs investing.