Regardless of whether you have invested in the market, or you are just getting started. At a certain point in your investment journey, we are sure most of you would have come across REITs. We truly believe that every investor should consider having REITs in their investment portfolio. In this article today, we will share more about what REITs are and what you need to know about these investments.
What are REITs?
Real Estate Investment Trusts (REITs) are publicly-traded companies that pool capital from investors to invest in real estate properties. The invested properties will then be leased out to tenants in return for rents. As an investor, you are also co-owner of the properties and hence, entitles to earn the rental income which is being collected. These returns are distributed regularly through dividend paid out to investors.
To put things in the simplest term, it is pretty similar to an investment in a brick-and-mortar real estate but at a larger scale. REITs are all around us. In fact, most of you would have walked into some of these properties before.
If you from Malaysia and have been to Sunway Pyramid, Gurney Plaza, or even Pavillion Mall, then you would have come across Sunway REIT, CMMT REIT and PAV REIT. From Singapore context, if you have been to malls such as Bugis Junction, Suntec City and Paragon, then you would have come across Capita Mall Trust, Suntec REIT and SPH REIT. These are some of the existing retail REITs in Singapore and Malaysia.
The interesting thing about REITs is that it is not new and is a relatively mature investment. In fact, they have been around since 1960 when the National Association Of Real Estate Investment Trusts (Nareit) was formed. It was however introduced at a later stage in both Malaysia and Singapore.
The first REIT in Singapore was introduced in 2002 and Malaysia back in 2004. REITs, in general, have come a long way maturing and developing over time.
Key Things You Need To Know About REITs
There are many things you need to educate yourself on REITs which you can easily find throughout our platform. But as a start, here are a few key things you need to know about them.
1. Tax Advantage of REITs
One of the biggest advantage REITs have as compared to other shares is their ability to be exempted from corporate income tax. That is if they distribute at least 90% of its current year earnings These are the incentives introduced by the Singapore and Malaysia government to promote REITs.
As a result, almost all REITs declare 90% of their earnings to enjoy the tax advantage. Essentially what it means is that the REITs do not have to pay the 17% (in Singapore) and 25% (in Malaysia) corporation tax.
2. REITs distribute 90% of their earnings (almost always)
The earnings are from rent received from tenants less all the expenses that would have been incurred to operate the REIT. For those who have invested in real estate, this is somewhat similar to owning your own physical properties. The net cash flow you would have received is the rental received less any property expense incur. In REITs context, 90% of these net earnings are distributed to investors.
Echoing the previous point on tax advantage, it is not surprising why most REITs tend to declare 90% of their earnings. Most regular stocks are subject to corporation tax and they do not distribute their earnings as high as 90%. Along with the tax exemption and high distribution rate, it is not surprising why the distribution yield of REITs are always higher compared to other stocks.
3. Diversification across different sectors
Earlier in this article, we have shared some of the retail REITs that you would have come across. Apart from retail REITs, there are also other types of REITs such as commercial REIT, industrial REIT, healthcare REIT and diversified REIT.
In Malaysia and Singapore, the majority of us would own at least one residential property. Not everyone would have the capacity to own other different class of properties such as commercial properties and etc. at a large scale. This is mainly driven by the huge capital needed to own these.
REITs allow you to have exposure in different sectors of your choice. Not every sector perform the same at different economic cycle. A perfect example would be during the COVID-19 crisis. The circuit breaker and movement control order in Singapore and Malaysia have been affecting retail REITs and hospitality REITs adversely. Healthcare REITs, on the other hand, has been rather defensive during this period.
As an investor, you would have the choice to choose the different sector you would like exposure in.
4. Hands-off property management
The fourth thing you need to know about this asset class is on the management of the properties. If you are currently invested in physical properties and had been dealing with tenants, you would have known that one of the most troublesome aspects of managing them is to deal with the maintenance and dealing with the tenants.
For REIT investors, these will be well taken care of. From dealing with tenants to the maintenance of properties. All this will be dealt with by the professional even on the aspect of looking for tenants. The only downside is these professionals’ charges management fee for all these services and these would reduce your earnings.
5. Gearing limit cap at 50%
Another important aspect you need to know about REITs is the leverage/gearing limit which they have to comply. To protect investors, there is a need for them to comply with a guideline as set out by the regulatory body in Singapore and Malaysia. The leverage limit is capped at 50% in Malaysia and 45% in Singapore (with a recent announcement to increase the limit to 50%).
In summary, REITs should definitely be one of the assets you should consider having in your investment portfolio. They are a rather defensive stock and most investors invest in this mainly for their appealing dividend distribution. Hopefully, you would have better clarity on what they are and gain some insight on a few things you need to know about them.