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Real Estate Investment Trusts (REITs)
At a Glance
Real estate made affordable
REITs are listed on the stock exchange and are bought and sold in minimum board lot sizes of 1, 10 or 100 units. Thus, making it affordable for investors to add real estate assets into their investment portfolio.
Passive income stream
Because REITs are mandated to distribute at least 90% of their taxable income back to shareholders as dividends, it is often regarded as a stable stream of passive income.
Professional property management
The real estate assets are professionally managed by property managers. They are responsible for leasing out the properties with the best tenancy mix and rental income, continually drive footfall, upkeeping the properties, positioning the properties, ensuring 100% occupancy and best tenancy mix to maximise rental income.
What is a REIT
A real estate investment trust (REIT) is a company that owns and operates a portfolio of multiple real estate properties, with a simple business model – to generate rental income and drive asset appreciation in the longer term.
HOW IT WORKS
A REIT pools money from investors and buys real estate properties. These properties are then leased out for rental income and redistributed to investors in the form of dividends.
Steady stream of passive income
Because they are regulated and mandated to return at least 90% of their taxable income as dividends, a well-managed REIT is especially popular amongst income investors, with the potential for capital appreciation over time.
Dedicated REIT manager
- Determines the strategic direction of the REIT, to achieve the best interests for its shareholders.
- Makes recommendations for asset acquisition, divestment or enhancement.
- Appoints a property manager for the day-to-day operations including managing the tenants, maximising the occupancy with the best tenancy mix, and the daily upkeeping of the properties.
TYPES OF REIT
REITs are generally classified by the type of properties they own:
BENEFITS OF INVESTING IN A REIT
Investing in a REIT holds several advantages over buying, financing and managing a property itself.
REITs are traded in minimum board lot sizes of 1, 10 or 100 units. Making them an enticing alternative for investors who wants to add real estate into their investment portfolio, without a hefty price tag.
Transparent & Liquid
Exchange-listed REITs can be bought and sold based on real-time pricing during stock market hours, conveniently and seamlessly.
Investing in a REIT dilutes your risk because you are investing in a portfolio of multiple properties. Also, some or all the properties in a REIT are located different geographical locations, offering investors diversification in a single transaction.
Because they are mandated to distribute at least 90% of their taxable income as dividends, making REIT an appealing investment choice for income investors with the potential for capital appreciation over time.
The property manager assumes the role of a landlord – enticing and managing tenants and the day-to-day upkeeping of properties.
CONSIDERATIONS WHEN SELECTING A REIT
REITs are not created equally. Because the real estate assets have differing nature and characteristics, understanding how each REIT works, the strategy and potential risks will help you immensely in your evaluation and selection.
Type of REIT
Taking a Retail REIT as an example – the quality of tenants, volume of foot traffic throughout the day and across the week, occupancy rates or a frequent change in tenancy are telling signs you can look for in your assessment.
Track record of the management team
A good management team will have the ability to achieve the best tenancy mix, upgrade the facilities and enhance the services of an underutilized building, thus creating more value for investors.
Other than the high dividend yield, it’s also important to review the track record – has this REIT been consistently in paying a stable dividend per share year on year?
Price-to-book value (P/B)
A fair valuation is when the P/B ratio is 1. A ratio above 1 means a REIT is overvalued, for instance a ratio of 1.5 means you are paying $1.50 for every dollar of net assets.
Represents the amount of income a REIT generates out of each property asset. While a higher ratio is desired, its also important to examine if the yield has been stable or growing.
An indication of the REIT’s use of debt, often to finance acquisition of new properties or upgrading existing assets. A higher ratio means they have more debt and carries higher risk. In Singapore, S-REITs have a regulated gearing limit of 45%.
The above list are not exhaustive, but serves as a starting guide to help you with your REIT assessment and selection.
How can I invest in REITs?
Like any listed stocks, you can buy and own shares of a REIT via a broker. Alternatively, you can also purchase an Exchange Traded Fund or Unit Trust that tracks a REIT index or has REITs as underlying assets.
You can also consider DBS Invest-Saver, a regular savings plan that lets you accumulate REITs affordably and progressively.