By Tam Ging Wien (guest contributor)

REITs in recent years have been garnering significant investor interest due to their stable income and high yields. With the Asian investor’s affinity for property, REITs took off in a big way. At the time of writing, the largest REIT markets in Asia are Japan, Hong Kong and Singapore.

What is a REIT?

A REIT is short form for Real Estate Investment Trust. REITs are a type of professionally managed collective investment scheme with its primary business being the acquiring, owning and financing of income generating real estate. REITs have the benefit of providing investors with a regular income stream and prospects of long term capital appreciation.

REITs provide investors an affordable means to invest in a diverse range of real estate assets. REITs tend to have a specific portfolio focus. Typical REITs are classified into the following categories:

  • Residential (e.g. Condominiums, Housing, Apartments)
  • Retail (e.g. Retail spaces, Shopping malls, Shops and Shophouses)
  • Offices (e.g. Office buildings)
  • Industrial (e.g. Factories, Warehouses, Industrial parks)
  • Healthcare (e.g. Hospitals, Nursing homes)
  • Hospitality (e.g. Hotels, Service Apartments)

Some creative REITs may even have investments in Car Parks, Billboards, Storage Spaces, Mines and Plantations just to name a few examples.

Some REITs specialize in portfolios in one region or country, while others hold a portfolio of properties in multiple countries.

Shareholders of REITs are also protected as regulations require that the REIT’s properties are held by an independent trustee. REITs have appointed managers to manage the REIT and act in the best interest of the shareholders. REIT Managers set the strategic direction, manage their assets and liabilities, and give recommendations to the trustee on the acquisition, divestment or enhancement of assets in accordance with the REIT’s stated investment mandate.

Typical structure of a REIT

Below is a diagram illustrating the typical structure of a REIT:

151214 Images

Some REITs have sponsors (typically but not necessarily property developers) which provide backing to the REIT by injecting their own properties into the REIT during listing. These sponsors continue to support the growth of the REITs by providing the REIT rights to acquire the sponsor’s future pipeline of properties. These sponsors may sometimes themselves be a major shareholder of the REIT they sponsor.

There are a group of securities which are said to have both a REIT and a Business Trust structure combined. These are known as “Stapled Securities” and are typically seen in the hospitality sector. The reasons for such structures are for risk management. For example, a hospitality REIT running a group of hotels may appoint an external hotel operator. In the event that the hotel operator is not able to fulfil its obligations, the REIT using the business trust is able to take over the hotel operations pending appointment of a new operator.

In Singapore, REITs are required to distribute least 90% of their net income after tax to shareholders. Shareholders enjoy these tax-exempted distributions in regular intervals (e.g. quarterly or half-yearly) throughout the year in the form of dividends. The first Singapore REIT was launched and listed on the SGX in July 2002.

Benefits and risks of investing in REITs

Investing in REITs provide various benefits as well as risks when compared to investing in the underlying property or real-estate. Below is a table summarizing these points:

151214 Table

Direct property investment is capital intensive. Large amount of cash is required for the down payment and transaction costs (e.g. stamp duties, legal fees, property tax etc.) Purchasing of property for most would also require a bank loan of easily 70% to 80% of the property price.

On the other hand, investing in REITs can be quite affordable. Yields are typically also higher, enabling investors to get a better return on their capital.

By guest contributor Tam Ging Wien, an avid investor and blogger who spends his time empowering the masses in financial education.

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