Real Estate Investment Trusts (REITs)

A real estate investment trust, or REIT, is a company that owns, operates or finances income-generating real estate assets such as shopping malls, offices, industrial estates, hotels, etc. REITs can be classified according to the type of real estates they invest in and the geographic locations they are in:

• Retails REITs (e.g. Capita Mall Trust, Hektar REIT)
• Industrial REITs (e.g. Quill Capita Trust)
• Office REITs (e.g. UOA REIT)
• Healthcare REITs (e.g. Al-Aqar Healthcare REIT)
• Hotel & Resort REITs (e.g. Sunway REIT)
• Residential REITs

Many investors might think of buying a physical property (private apartments, shop houses, etc.) when it comes to investing in property. What they might not know is that REITs allow investors to have vested interests in the real estate sector without having to make significant commitment to purchase the property. Majority of the investors may not have the capital required to invest in properties and REITs offer them a cost-effective way to gain exposure to physical property and diversify their investment portfolio.

REITs Investments Vs Real Estate Investments

	REITs	Real Estate
Capital Outlay	Flexible, as low as a few hundred dollars	Capital Intensive and usually requires leveraging
Process	Simple, transacted like shares on stock exchanges	Long process from viewing to completion of paperwork
Yield	Yes, from dividend income	Yes, from rental income
Capital appreciation/ depreciation	Capital gain / loss depending on demand & supply on stock exchanges and performance of REITs	Asset appreciation / depreciation depending on supply & demand for properties in the open market
Barriers to Entry/ Exit	Can be transacted readily on stock exchanges	A need to source for buyers who are willing to match the asking price for the property
Price discovery	Prices quoted on exchanges	Need to source for valuations and professional valuators

Characteristics of REITs

The underlying assets of REITs are professionally managed and income generated from the assets (primarily rental income) are distributed to investors at regular intervals. Thus, REITs are ideal for investors looking for constant dividend pay-out throughout the year (dividend frequency and yield depends on policy of respective REITs).

REITs are transacted on stock exchanges around the world. However, REITs, being similar to equities, are especially susceptible to market risks and non-market risks. For example, Retail REITs’ performance are vulnerable to the economic climate and are positively correlated to the consumers’ spending power (Market Risks). Physical retail malls (underlying assets of Retail REITs) are also facing tough competitions from online retail outlets, which will in turn affect the Retail REITs’ performance (Non-Market Risks).

In addition to the wide variety of different REIT sectors, REITs may also be located in different geographic regions and are vulnerable to the particular political development and fiscal policy of the region. For instance, a fall in interest rate may encourage businesses to borrow more and invest into retail or office space, which will in turn drive up the performance of the respective REITs. Conversely, an increase in interest rate will increase the cost of borrowing and ultimately affect the gearing ratio and performance of REITs.

Political climate, consumers’ trends, fiscal and government policies are constantly unfolding and changing throughout the world. This framework meant that REITs are notably exposed to the changes in their external and internal environment.

5 Advantages of REITs

• Wide variety of REITs available in different geographic locations
• Cost-effective method to gain exposure to real estate industry
• A unique asset class for investors to diversify their investment portfolio
• Stable dividend pay-out and decent dividend yield
• Suitable for investors looking to supplement their passive income