Real Estate Investment Trusts or better known as REITs are one of the instruments that I invest in. It is definitely not something new but probably not something Malaysians are familiar with. But it has been getting the exposure and made known lately.
By the end of this post, you will get an overview of what REITs are and why you should consider this as one of your investment.
What Are REITs
REITs are basically similar to an investment in a brick-and-mortar real estate whereby it is a company that owns, operates properties and collect rental income from its tenant. As a REIT investor, you are actually buying a share of the underlying property own by the REIT.
There are many types of REITs like industrial REIT, office REIT, hotel REIT and etc. But to give you a clearer picture of what REITs are, I will use retail REIT as an illustration. To those who love to shop, I am sure you have been to malls like Sunway Pyramid, Midvalley, and Gurney Plaza. These malls are managed by REITs whereby they owned, operate and collect rental income from the tenants.
Owning a unit of REITs means you own a share of the property in which the REIT owns. Take Sunway REIT for instance which own Sunway Pyramid, Sunway Pyramid Hotel, Sunway Hospital and etc. When you buy a share in that REIT, you technically own a small piece of the pie without actually buying all the properties which can be expensive. And when they collect the rental income, you as the owner will receive it as well.
Sounds good right, owning a diversified portfolio of properties without actually forking out a huge sum of money.
REITs Regulation in Malaysia
In order to protect the investors and instil market confidence in the market, REITs need to comply with certain guidelines by Securities Commission. Firstly, REITs are meant to be safe investments. To prevent the risks of over-leverage, they can only make borrowing up to 50% of total assets. Any limit above 50% will need approval from unitholders. The rationale behind this is to protect investors from REITs that are making a return from heavy debt reliance which could leave them in a vulnerable state during poor economic times.
The second incentive would be tax benefits in order to promote REITs in the markets. The tax benefits mentioned here is that income earned by them will be exempted from income tax. To qualify for the exemption, they need to distribute at least 90% of its current year taxable income to the unitholder. If they fulfil the 90% requirement, the REIT will not be levied a 25% income tax.
With the regulation in place, most Malaysian REITs will opt to distribute at least 90% of its taxable income. I mean who wouldn’t when you can be exempted from paying a 25% income tax. This explains why REITs tend to declare higher dividend compared to other companies.
How do REITs grow
If you are investing in REITs, you are probably expecting a high dividend yield from the investment. But as an investor, we do not only seek for stable dividend but also REITs who are constantly trying to increase their distribution over time. There are many ways REITs grow. The common one would be through rental increase. Retails REITs such as Sunreit, CMMT will always seek to negotiate for higher rental fees depending on the supply and demand.
Asset enhancement activities are also another way of increasing the income of the property. Take Sunreit as an example, you probably have seen a lot of refurbishment and renovation work around Sunway Pyramid. All these are initiatives taken to enhance the value of the property. Another way they can grow is through the acquisition of attractive properties opportunities. But of course, the REITs will need to make a sound decision on whether the increase in rentals earned will more than offset the cost of debt or equity dilution. If yes, this will then lead to a higher distribution per unit.
What are the benefits of REITS and why you should invest in it
Investing in REITs cost way lesser than if you were to invest in real estate. Unlike owning a property where you would need huge funding to own it, you can start off with any amount with REITs. Imagine this, you can share a piece of the mall and you always go to with an investment of RM1,000.
REITs can be easily traded on the stock exchange, in the case of Malaysia, Bursa stock market. This makes it more liquid as compared to physical properties as the listed REITs are readily converted to cash. Love this REIT, then simply buy it and if you no longer see the prospect in it, then sell it off. It is as simple as that.
You are not able to do easily if you owned a physical property where you need to find a willing buyer and lots of paperwork to complete the transaction. Having said that, I am not saying that owning a property is bad. This is just for comparison purposes.
High Dividend Yield
As previously mentioned, most REITs tend to declare 90% of their profits as dividend making them one of the highest dividend yield distributing corporation. These dividends declared are derived from rents paid by the tenants who occupied the properties. Which is similar to renting a property you own to a tenant. The income you receive is now paid out to you in form of dividends.
Putting all your eggs in a basket is never a good idea. I am sure most of your investments would spread out across various instruments and industries. But in the real estate industry itself, REITs investment allows you to diversify your investment in various ways. Firstly, when you invest in a REIT, it allows you to spread the risk across multiple properties owned by them.
Depending on the type of REITs you are investing in, you can also diversify your portfolios across the different real estate profile. Take SUNREIT where they are not only involved in the retail side but also in hotels and office. Thirdly, you can also get diversification in terms of the geographical spread where the properties are located across other states in Malaysia. Some like YTL REIT even have portfolios in other countries.
This is the kind of diversification you will not be able to get through the physical purchase of properties.
If you own a property, you either manage it yourself which can be a hassle or you get someone to do it for you for a fee. REITs have a team of experts called the property manager that will handle all this. The upside is they are hired because they are good at what they do. With their strong expertise, we can certainly let them do what they do best and just reap the returns.
REITs in Malaysia
There are a total of 18 REITs listed in Bursa Malaysia as at December 2017. Some of them are engaged solely in the one type of portfolio (hotel, retail, industrial, office and etc.) whereas some are involved in diversified portfolios (2 or more types).
|Stock Code||Short Name||REIT|
|4952||AHP||Amanah Harta Tanah PNB|
|5116||ALAQAR [S]||Al-Aqar Healthcare REIT|
|5269||ALSREIT [S]||Al-Salam REIT|
|5127||ARREIT||Amanah Raya REIT|
|5106||AXREIT [S]||Axis REIT|
|5180||CMMT||Capital Malls Malaysia Trust|
|5235SS||KLCC [S]||KLCC REIT|
|5109||YTLREIT||YTL Hospitality REIT|
How to Invest in REITs
Now that you have a rough idea what REITs are, the question is how can you start investing into some. They are listed in the stock market, in the case of Malaysia, Bursa Stock Exchange. Simply head over to the Bursa website and you can see the list of REITs available in the market. Buying and selling REITs work the same as buying shares in the stock market and the dividends will be credited directly to your bank account.
The post is just a general overview of REITs in Malaysia. I am not advocating that they are the best instrument to buy but merely option you can look into. It does give really good returns. Similar to any stock, there is a need for you to analyze and perform due diligence on it before buying any.
Currently, they make up a huge proportion of my investment portfolio as I enjoy the high dividend yield from it. I am not an expert in investment matter but just merely sharing what I know. Do let me know if I’ve missed out anything important or if there are any recent updates on Malaysian REITs.