#1. What are REITs?
REIT stands for Real Estate Investment Trust. It is a trust that invests solely in real estates and is listed on the stock exchange (Bursa for Malaysia). In a typical REIT structure, money is raised from unit holders through an Initial Public Offering (IPO) and used by the REIT manager to acquire properties. These properties can be retail malls, industrial properties, commercial properties, etc.
How REITs generate income is by leasing out the properties that they’ve acquired and in return, the income flows back to the unit holders (investors) as income distributions (which are similar to dividends) after charging a small percentage of management fee (i.e. REIT manager remuneration and other related expenses to operating the REITs). For simplicity purposes, the diagram below represents the overall structure of REITs in Malaysia.
- Investors – Individual that buys REIT shares in stock market
- Trustee – Separate entity that acts on behalf of unit holders and has duties laid out in the Trust Deed to ensure REIT complies with all applicable and protecting certain rights of investors. The property assets of the REIT are held by an independent Trustee as shown in the table below.
- REIT Manager – Responsible in setting the overall direction of REIT which includes acquisition of properties, carrying out enhancement initiatives or optimizing capital structures.
- Property Manager – Responsible in providing on-ground services such as collecting rental from tenants, promotional and marketing initiatives and ensuring the physical wellbeing of property.
Below is the list of REITs and Trustee in Malaysia as of 17th September 2017:
#2. Why we invest in REITs?
Low Capital Requirements
Invest in properties for rental yield is a good idea but there is always an issue with the initial capital and the amount of mortgage to purchase property. This initial capital restriction, has caused many people unable to enjoy stable rental income deriving from properties. However this is not the case because REITs might be one of the best options you have to invest in properties for rental yield. With low capital required (as low as RM100), anyone can purchase/own certain percentage of property related investment. This in fact differentiates REITS and physical property investment in term of capital requirements.
In order to take the advantage of tax system, REITs companies must distribute 90% of their earnings to shareholders as shown above by Malaysia Tax Authority. This in turn position REITs into high dividend yield and defensive stocks to own. The first characteristics in evaluating REITs are the dividend yield. Consistent and growing dividend pay-out is the key elements in identifying great REITs. Since it is defensive in nature, investor must understand that REITs is not a growth stock and should not expect large amount of capital gain.
Liquidity refers to how easy it is to sell your investments at the appropriate price. However, assets like property, art and precious metals might not be so simple. Most people realize they might have made a mistake in property investment when the market starts to turn. In those situations they might not be able to sell their investments fast, and at the price they want.
However in REITs, investors are able to buy and sell shares in a few minutes. I cannot emphasize this enough, think of the hassle you have to go through just to sell an apartment unit such as finding a buyer, negotiating price, putting up banners and finding lawyers. This will at least take few weeks or months of your time to sell a property.
Whenever you need cash fast, you will realize how important liquidity is. Emergencies aside, liquidity will save you a huge amount of time when disposing of REITs.
Managed by professionals
Just lay back and let the actual real estate experts handle and manage your properties. Who do you think owners of a RM1 billion shopping mall like Mid Valley and the Gardens will hire to manage their properties? The managers will of course be the very best in the field and have tons of experience. With expertise like that on your side, you leave the acquisitions, the disposals and the management of your properties to true professionals.
#3. Passive Wealth Machine
Most business or investing methods require a huge amount of initial effort to learn and understand what you are doing and putting your wealth into. There is also recurring effort to ensure you manage and maintain your financial assets and reinvesting them in a prudent manner which are difficult to manage.
How is this related to Malaysia REITs? Let’s take IGB REIT as an example. The initial effort is required where we need to scrutinize and understand the company’s business model, business risk, investment risk and management. However, the recurring effort is taken care of by the property manager and REIT manager where rental collection, property maintenance, chart strategic direction for the REIT, forecast of revenue and debt management are performed by them.
Imagine if we were to buy a property and rent it out to tenant. Firstly, we need to put huge amount of initial effort as usual to understand the property and surroundings. Once we found a tenant, we are required to collect rent, establish good relationship with tenant, run errands and handle complains. If we use the Initial Effort and Recurring Effort method, REITs are far simpler to be considered passive wealth machines.
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