If you have been investing for a while, you would have come across various different type of financial instrument. From ETFs, bonds, precious metals and etc. One of the popular investment instrument which has been around for quite some time now is the real estate investment trust (REITs). In this article today, we will share 6 reasons why you should invest in REITs
To put things in the simplest term on what REITs are, they are companies which own multiple properties which they lease to tenants. And in return, they would collect rental income from them.
1) Easy investment vehicle to understand
REITs are an investment vehicle which revolves around real estate. Growing up in Asia, being in Singapore or Malaysia, we are brought up with the mindset of real estate being a great investment. Owning physical properties is a common dream for many. Some of you may have even owned it by now.
Hence, REITs would potentially be one of the investments that many can easily relate and understand.
“Never invest in a business you cannot understand.” – Warren Buffett
Picking up and learning on any other investment in other industry is definitely doable. But REITs are easier to understand than others and hence makes it easier for most people to begin with.
You will be able to equip yourself and fill the knowledge gap of investing in REITs far quicker than to equip yourself in another industry, i.e the financial industry or manufacturing industry.
2) Allow you to take partial ownership in real estate
Another reason you should invest in REITs is that it gives you partial ownership in real estate. As an average middle-income earner, the average number of properties you would likely own in your life would be 1 to 2 properties.
Take Singapore for instance. It would be affordable to own your very first HDB (Singapore government public housing) property but any other subsequent purchase would be subject to additional buying stamp duty. Not forgetting the down payment you have to pay upfront.
Investing in real estate required a huge down payment. REITs, on the other hand, provide you with similar exposure to real estate investment through partial ownership. Instead of forking out a huge sum of downpayment to fund one single property.
The same sum would give you similar exposure to multiple REITs with different property exposure. You have partial ownership in the real estate receiving portion of the rental income collected and in return being fuss-free of managing the property.
Here’s a quick illustration.
Owning a $1million dollar property with a downpayment of 20% would mean upfront cash of $200k. With that $200k invested in REITs which typically gives an average yield of 5%-7%. That would give you an annual dividend of $10k to $14k.
3) Diversification of real estate class
Instead of investing in residential properties alone, one of the reasons you should invest in REITs is the diversification you get. REITs give you exposure to real estate you will never likely own in your lifetime.
There are various different type of REITs in Singapore and Malaysia market ranging from commercial REIT, office REIT, retail REIT, and healthcare REIT to name a few. Take healthcare REITs which invest healthcare-related real estates assets such as Al-Aqar REIT, Parkway Life REIT or First REIT. Or even retail REITs which invest in retail real estate assets such as Capitaland Mall Trust and Sunway REIT.
Not all segment perform equally well. A great example would be during COVID-19 uncertainty, many of the retail REITs are adversely affected. Healthcare REIT, on the other hand, are more resilient. Investors have the choice to diversify their real estate investment and get exposure across multiple industries.
4) Diversification of your investment portfolio
Never put all your eggs in one basket. That is a very commonly known phrase. For active investors who have investment exposure in shares, REITs give you exposure in the real estate industry. This would help in diversifying your portfolio risk.
5) Attractive dividend payout and yield
Another reason why you should invest in REITs is due to the dividend payout nature. To enjoy special tax treatment, REIT must payout at least 90% of taxable income each year which is why their yield is generally better than typical stocks in the market. In general, REITs would give you an average yield of 5% – 7% annually.
Apart from dividend yield, investment in REITs would also provide you with capital growth. Similarly, there is also a risk in capital loss.
Dividend + Capital Gain/Loss= Total Return
6) REIT has been there for almost 60 years
Last but not least, REITs are not a new form of investment. In fact, it has been around since 1960 when the National Association Of Real Estate Investment Trusts (Nareit) was formed. But of course, REIT was introduced at a later stage in both Malaysia and Singapore.
REITs were first introduced in Singapore back in 2002 and Malaysia back in 2004. REITs, in general, have come a long way maturing and developing over time. Hence, they are definitely not a new instrument.
Having said that, similar to any other investment out there, you have to do your own due diligence prior to investing in any REITs. If you are just getting started, do keep up with us as we will be occasionally sharing more on REIT Guide and REIT Analysis.