Definition of Real
Estate Investment Trust (REIT)
Real Estate Investment Trust or REIT is a type of security
that invests in real estate through property or mortgages and often trades on
major exchanges like a stock which allowing both small and large investors to
acquire ownership in real estate ventures, own and in some cases operate
commercial properties such as apartment complexes, hospitals, office buildings,
timber land, warehouses, hotels and shopping malls and earn rental income from
its investment.
In Malaysia, REITs are required by law to maintain dividend
payout ratios of at least 90% of its net income, making them a favorite for
income-seeking investors. REITs are sold to the public via an Initial Public
Offering (IPO), and they are traded like securities in the stock market.
Normally, REITs pay a distribution income on quarterly or half yearly basis.
REITs behave similarly like any publicly traded company
stocks. However, they are less risky as their income is derived from assets
rental, and the tenants are locked in for specific period (normally over 2-3
years before new contracts are re-negotiated). You are assured of a stable
income stream almost every year.
Types of REITs:
Retail REITs
These REITs invest in shopping malls. They have their own
management team to manage the malls. Their earning mainly derived from the
leasing of space to retailers. Earnings from rental may be affected during
economic downturn as retailers may default on their rentals if the retailers
experience cash flow problems. Retailing is a highly competitive industry,
therefore the management needs to create a right tenant mix and be aggressive
in promoting activities to drive traffic to the mall to spur business growth.
Residential REITs
These REITs own and operate serviced or rental apartment
buildings. The best markets for apartment rental are always in the large cities
where limited and costly space affects the level of affordability, thus
prompting the population to rent rather than to own properties outright. With
consistent demand, rentals can increase, and will ultimately benefit these
REITs.
Healthcare REITs
These REITs invest in hospitals, medical centers, nursing
facilities and retirement homes. These REITs rely on fee charges by the
hospitals and medical centers and income earned from the occupancy of the
nursing facilities and retirement homes. Generally, nursing facilities and
retirement homes are popular among the aging population, therefore providing
the necessary catalyst for the incorporation of healthcare REITs.
In countries where there is a comprehensive healthcare
system, there could be reimbursement of fees from government which allows a
larger pool of the population to use it medical services, thereby expanding the
income coverage. However, any reimbursements by the government are subject to
the law, and any change to this law can likewise affect such reimbursements.
Office REITs
These REITs invest in office buildings and derive their income
from rental of office space to tenants. In selecting the best office REITs,
cities which are the gateways to the larger continent, regional hubs for
multinational companies or international financial centers are in focus.
Rentals in these cities are expensive, even more so in a booming economy, which
lead to increased rental.
Mortgage REITs
These REITs loan money for mortgages to owners of real
estate, or purchase existing mortgages or mortgage-backed securities. Their
revenue are generated primarily by the interest that they earn on the mortgage
loans.
Hotel or Resort REITs
These REITs invest in and manage hotel properties. The
occupancy is the main gauge on the performance of these REITs which has to be
based on cities with high tourist arrivals or which are top business destinations
themselves.
Infrastructure REITs
These REITs invest in basic infrastructure facilities such
as water treatment and power plants, gas and electricity supply, and telecommunication
infrastructure assets.
Industrial REITs
These REITs invest in major industrial complexes. Occupancy
is also an important criteria when assessing the worthiness of investing in
these type of REITs.
Logistics and
Warehousing REITs
These REITs invest in asset which support the logistics
business such as warehouses and distribution centers.
Agricultural or
Farmland REITs
These REITs invest in plantations or farmlands, and the
source of income is from the leasing of such lands to the farmers.
Hybrid REITs
Not all REITs invest in a specific class of assets. There
are some REITs which invest in commercial buildings which includes retail and
office assets.
Why invest in
REITs?
1.
REITs
are easier to trade
REITs are easy to trade where you can do it online or via a broker as it
is traded in stock exchange. Besides that, the transaction fees are very minimal.
2.
Investors
only invest the amount that can afford
The most striking different between a REIT and property is that investors
only invest the amount that the investors are able to afford. With a RM5K (or
lower), investors can readily invest in REIT whereas the same amount of money
is not even enough for most of the small investors to pay the 10% deposit for a
property.
3.
REITs
allow you to have a steady and stable income stream
Most of the REITs pay distribution income every quarterly or half yearly.
On average, a good REIT will yield a return of 6% to 7% of the amount invested
per annum. Investors are assured of a steady income stream over a long period
because lease contracts are often secured over a period of 2-3 years. If the
demand for the property is strong, investors can be assured that any renewal of
existing contracts will come with an increase in rent.
4.
A
professional team to manages the properties
All REITs are managed by a professional management team to help secure
the best tenants for the properties. Ultimately, investors have a management
team who will seek out the best deals for the REIT thus benefitting the
investors.
In
future article, I will be write the article with actual example to understand
the financial of a REIT and list of Malaysia REITs listed in Bursa Malaysia.
Sources:
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