By Stella Goh – Market Data Analyst | 18 August 2018
The term REITs stands for Real Estate Investment Trust. It is a trust fund that invests in Rental properties. REITs allow companies to purchase real estate or mortgages by using the combined of investment from the investors. They offer the benefit of real estate ownership to the investors which they may not face any problems that landlords usually encounter. Due to the nature of real estate investing, REITs typically do better in the low-interest rate environments and when the interest rates are increasing, it is usually a bumpy ride for the REITs market.
How Does a Company Qualify as REITs?
The company must hold at least 75% of total investment assets in real estate. The 75% of the assets that they owned must come from rents or mortgages property. The REITs pay out 90% of its taxable income to their shareholders as dividends. They are taxable entities that managed by a board of directors or trustees. They must be at least 100 of shareholders, and a few of the shareholders do not have more than 50% of shares during the last half of each taxable year in the market.
There are two types of main REITs in the market, generally known as Equity REITs and Mortgage REITs.
Equity REITs is used to purchase, own, and manage income-producing real estate properties. Equity REITs typically invest in residential, retail office, industrial and hotels. The revenue is mainly from the property rental income. Equity REITs can be beneficial to the long-term investors. This is because they not only pay out the majority of their income from rental to their shareholders, but also the shareholders may receive capital gains if there is the sale of properties.
Mortgage REITs is a type of REITs that generally lend money to the real estate buyers or acquiring the existing mortgages or mortgage-backed securities (MBS). Mortgage REITs do not invest in the properties, but they will generate revenue through the interest paid on their mortgage loans.
A mortgage-backed security is a type of securities that sold to a group of individuals such as government agency and investment bank that use to securitises packages loans together into a product that investors can buy. Mortgage REITs purchases mortgages on the secondary market.
Why Invest in REITs?
- Affordable and Convenient
- Regular Dividend & Inflation Hedge
Affordable and Convenient
REITs listed on the stock exchange in Bursa Malaysia which allows investors to buy and sell in the exchange market. The minimum amount of units to be bought and sold is set to be 100 units per transaction. It tends to be more liquid when it compare to physical properties. REITs can be bought and sell off quickly due to it had been a package like shares, where you do not need to own a whole building which will cost a lot more and needs to go thru a time-consuming process.
Regular Dividend & Inflation Hedge
Real Estate Investment Trust (REITs) can be an attractive investment option because they are producing a stable flow of passive income for the investors who seek consistently, regular income and long-term growth. The usual dividend payout schedule for REITs is on quarterly or bi-annually basis. Dividend payout for REITs is pretty attractive because they pay out nearly 90% of their net income that to be eligible for tax treatment. Besides that, REITs’ dividend tends to be higher than fixed deposit rates in the bank. Therefore, it helps investors to reduce the devastating effect of inflation.
Real Estate Investment Trust can be helped to hedge against inflation. This is due to the rising of the resale value of the property over time, and also the real estate can be used to generate rental income. Just when the value of the property rises with inflation, the rental will be increased steadily, enabling the income generated by an investment property keep pace with the general rise in prices across the economy.
REITs offer access to the real estate market typically with low correlation with other stocks and bonds, due to real estate markets price had lower volatility than in the stock markets. Capital gains play an essential role in the REITs as the ongoing collection of rental from the properties contributes excellent value. Such income does not link directly to the market’s sentiment at all. By adding REITs to the portfolio, it will help to improve overall diversification and create stable long-term returns.
It is critical for us to understand the REITs first before investing in it. REITs are structured to be long-term investments because of its specific features of affordable and convenient, regular dividend, hedge inflation and diversification. In conclusion, an appropriate allocation of REITs in one’s portfolio can improve its potential to generate higher returns at low volatility.