Real Estate Investment Trust

Introduction to REITs

For most people, investing in real estate is limited to residential ownership with little thought of owning shopping complexes, industrial warehouses or office buildings etc. Now, real estate investors can literally stretch their investment horizon with REITs (pronounced “reets”) which combine the best features of real estate and trust funds. They give an investor a practical and effective means to include professionally-managed real estate in their own investment portfolio. It also allows small investors a means to invest in real estate assets through a vehicle that is highly liquid compared to buying a real estate itself and with a smaller investment capital.

What is REIT?
Real estate investment trust or REIT is a collective investment vehicle, in the form of a trust fund, which pools money from investors and uses the pooled capital to buy, manage and sell real estate assets, such as residential or commercial buildings, retail or industrial lots, or other real estate-related assets (e.g. shares in public-listed property companies, listed or unlisted debt securities of property companies etc.). It is a passive investment vehicle which acquires and holds income generating real estates. REITs are driven primarily by recurrent rental income from real estates, and will distribute its income based on the prevalent tax structure governing REITs, thus providing stable and consistent income to unit holders.

The objective of REITs is to obtain reasonable investment returns. Total returns are generated from the rental income plus any capital appreciation that comes from holding the real estate assets over the period. Unit holders will then receive their returns, be it in the form of distribution or capital gains.

How does it work?
In essence, REITs work like any other trust funds which involve the following parties:

How to invest in REITs?
There are listed and non-listed REITs. For listed REITs, you can buy and sell them like listed stocks. There are currently REITs listed on the Bursa Malaysia and investors need to go through a stockbroker to invest in them. Like any listed products on the Exchange, investors should be aware that REITs may trade at a premium or discount to their respective net asset values.

For unlisted REITs, like any other unit trust products, you can buy from or sell to the management company or through other authorised agents.

What is the difference between REITs and property stock/company? 

REITs vs. property stock/company

REITs Property stock/ company
A collective investment vehicle, in the form of a trust fund, that invests in real estate and property-related businesses, including property stocks. Property stocks are shares of companies (property companies) which deal in real estate or property-related business.
A Securities Commission (SC) approved management company manages a REIT. An appointed trustee safeguards the assets for unit holders. A property company is managed like any other company.
A REIT has a well-defined investment policy and invests largely in a portfolio of income-generating real estates. A property company owns real estates and is not restricted to carrying on a business in property investment and property development.
The trustee holds the real estates or properties in a REIT portfolio on trust for the REIT investors. The board of directors, on behalf of the shareholders, will monitor a property company to ensure that its assets are protected and that the company is properly run.
A REIT investor is subjected to management and trustee fees, including property management fees. An investor of a property stock is not subjected to management or trustee fees
REITs are exempt from income tax if 90% or more of its total income is distributed to unit holders. Otherwise, the total income of the REIT will be taxed at the prevailing rate. A property company is subject to corporate tax.

Why should you invest in REITs?

  • Professional management 
    Professional managers manage REITs and they have the expertise beyond the knowledge of individual investors.
  • Liquidity (Unlisted REITs)
    Unlike traditional private real estate ownership, unlisted REITs are liquid assets that can be sold fairly quickly to raise cash or take advantage of other investment opportunities. One of the reasons for the liquid nature of REITs is that its units are primarily listed and traded on a stock exchange.
  • Convenience 
    Sale and purchase agreements, lawyers’ fees and stamp duties are among the many things real estate investors have to put up with. Through REITs, investors are relieved of such factors.
  • Comfort of regulations 
    REITs must comply with the requirements of the Guidelines on Real Estate Investment Trusts and the Guidelines on Islamic Real Estate Investment Trusts, as well as the Capital Markets and Services Act 2007, which has investor protection as one of its key objectives.

Risks associated with REITs

Distribution is subject to cash availability

If the real estates of the REITs do not generate sufficient net operating profit and cash flow, the REITs ability to make distributions will be adversely affected.

Returns are not guaranteed

The distribution payments from investing in REITs are not guaranteed and the total return of REITs, amongst others, is subject to the performance of the property market. Hence, the unit price of a REIT may go down if its underlying properties drop in value.

Loss of control over investment

Investors will not have direct control over the management company’s investment decisions like when to buy or sell certain real estates, or how they will be managed.

Market factors

Like other investment products, REITs are subject to the vagaries of market demand and supply. As such, market volatility, confidence in the economy and changes in the interest rates may affect REITs price.

There are other risks associated with investments in REITs. Please read and understand these risks that are extensively highlighted in the REIT’s prospectus.

Before you invest in REITs, observe the following:

  • Read and understand the prospectus thoroughly;
  • Study the list of real estates included in the REIT investment portfolio, such as the location of the real estates, tenancy mix, lease length, rental payments in arrears and other related investment information (e.g. distribution and fees and charges);
  • Analyse and understand the fund’s annual reports.

So, if you are thinking of investing in REITs, get as much information as possible on the product from the management company to help you make a well-informed decision. If in doubt as to the action to be taken, consult your stockbroker or any other licensed professional adviser.

InvestSmart