Sunday, 21 December 2014

Why Do I Invest In REIT

There are many types of business we can acquire in the market (sounds like towkay eh ;p). Some examples includes F&B business such as Old Chang Kee, supermarkets such as Sheng Siong, and my personal favourite, business dealing with real estates (malls, office space and homes).

For business dealing with real estates, there are property developers such as CapitaLand, and property owners such as Real Estate Investment Trust (REIT). REITs are essentially investments trust listed on the stock market that owns real estate assets (malls, office space, homes, etc), allowing them to receive recurring income.

Surely you can tell that I am predominantly vested in REIT by now right? So why do I prefer REIT as an investment?

Allow me to relate to you from a viewpoint of a tiny weeny insignificant retail investor as to why I prefer to invest in REITs. 

Low Barrier to Entry 
The most important reason. For someone like me who has always been interested in owning multiple properties (monopoly fanatic you see..), REITs offer me the opportunity to own real estates without requiring a huge outlay of cash unlike other real estates’ investment.

If you purchase a property on your own, it is the norm to foot a down-payment of tens of thousands of dollars, and that is not even including other hefty costs such as stamps fee, renovation, etc.

However, the cost of initiating your REITs investment can be as low as a few hundreds dollars, a sum I can comfortably afford. Therefore, REITs have enabled me to be a 'property owner' even though I do not have much capital.

Sales and purchases of any REITs shares can be done in a matter of minutes in the stock market. Can that be said for other real estates’ investments? I would think not.

Let's now imagine that I possess a physical property and the property market is expected to be on a downtrend in the near future. At this particular moment,  I needed cash urgently and hoped to sell my property in a downbeat market. The likelihood of me selling that property quickly is very low unless I lower my price substantially.

Should I decide not to lower my price,  I would have to wait for a long while before the property gets sold. Let's not forget for a moment that cash is required urgently and the value of the property is dropping daily during this period. Sounds kind of stressful to me indeed. Lol.

Hence, time is of the essence here. This factor is very important to small time investors like me. Investing in REIT allows me buy and sell within hours or even minutes, thus allowing me to be nimble with my limited funding.

With limited capital, investing in REITs allow me to spread my risk amongst a number of properties and different segments of the real estate industry (industrial, retail, residential, etc.). Additionally, if I find that the local property market is over-heated, I can just choose to invest in a REIT that owns their properties in other countries.

This is as opposed to owning physical properties where my fortune could be badly affected by a single bad property investment. 

Relatively High and Constant Yield
Most REITs distribute at least 90% of their annual profit to their shareholders so as to enjoy tax breaks. Therefore, shareholders are guaranteed of obtaining recurring income as long as the REIT is making a profit.

With 90% of their profits going to their shareholders, REITs are able to offer relatively high dividends yield in the range of 5.5%-8% on average. This payout is relatively higher when compared to the dividend yield of most equities which range between 2%-4.5%.

Fuss Free 
As REITs’ properties are all managed by professional facilities management team, there are no nasty tenants for you to deal with when the pipes burst, lighting blows, etc, as they will be taken care of by the facilities management team.

When the property starts getting old, most well-run REITs will also plan for upgrading works to ensure that the value of the property does not depreciate. This is something most retail investors will not be able to execute on their own.

Liaising with tenants over complicated leasing agreements is also not required. With REITs, they have dedicated teams who will look for tenants, ensure the right tenants mix and to maximise the property revenue.

Therefore, by investing in REIT, I am able to sleep well at night as I know that the properties are well taken care of. Or maybe I am just a heavy sleeper. lol


Investing in REIT is not without its drawbacks. When investing in REIT, we should consider these drawbacks in order to make an informed decision.

Co-relations with Broader Stock Market
Although REIT are fundamentally real estate’s investments, the value of their shares are still intrinsically tied to the stock market since they are listed there. Therefore, the value of our REIT investments will also be subjected to the stock market sentiments and not just the real estates segment. Do not be surprise if the value of your REIT investment falls even though the real estates market is holding up well. When the stock market is crashing, the value of your REIT investment WILL (confirm+chopped) drop too.

Low Cash Reserve
As the majority of the REIT’s profit goes to the stockholders, REIT usually have very little cash reserve to purchase additional properties. When there are opportunities to acquire  more properties, REIT will have to raise the cash by:
  • Piling on more debts which might cause it to be overly-leveraged; 
  • Issuing more shares in the market which will dilute current shareholders’ holding unless the shareholders purchase the additional shares.
The aftermath of the two action plans mentioned above will have detrimental effects on the value of our REIT investment if the REIT does not invest wisely with the cash raised. Hence, we have to look into the acquisition history of the REIT to determine if their acquisitions have been beneficial to shareholders in the long term, i.e. yield accretive. 

Links to Parent Company (Developer)
Some REITs are created by a parent company, usually a property developer, to purchase the real estates properties that are newly constructed by the parent company. The main reason for doing so is to offload the newly developed property into the REIT in exchange for quick capital in which the parent company would be able to reinvest into.

This strategy sounds great theoretically. The REIT has first choice when it comes to the sales of the property while the parent company would have access to fast cash raised by the REIT to purchase the property.

However, what happens if the parent company decides to make their subsidiary REIT pay for an overpriced property?

Therefore, we have to check if the REIT has a tendency of purchasing overvalued properties from its parent company so as to maximise the value of our REITs investment.

Currency Fluctuation for Overseas Assets
As with other investments that have assets and earnings from overseas, REIT investment is similarly subjected to currency volatility if they insufficiently hedged against it.

This factor will have a great impact on our REITs investment if the vast amount of the REIT earnings and assets originate from overseas. A 20% drop in the value of the currency will result in not just a 20% drop in earnings, but also a 20% drop in the value of the REIT assets. This will most likely cause a massive drop in the REIT share price as the investors start panic selling.

Personally, I have experienced this issue with my investment in Lippomall. The value of my Lippomall shares dropped by more than 20% due to the devaluation of the Indonesia Rupiah, which is where most of Lippomall's revenue is accounted for. This is even though the REIT is reporting healthy profits in terms of Rupiah!

Hence, we must have an understanding of the currency exchange situation in which the REIT is involved in. By understanding, we will be able to avoid or mitigate losses similar to what I had faced with Lippomall.

Lippomall REIT. One painful lesson which I'll blog in detail someday:(

To sum it all up, investing in REIT has both its rewards and drawbacks. Only by understanding both  then are we able to determine if investing in REIT fits our investment profile.

For example, if you are in your 20′s and have a very high tolerance for risk with the expectation of high returns within a short time horizon, REIT investment might not be your cup of tea. This is because the steady returns from investing in REIT will never allow you to obtain the high returns you desire in such a short period of time.

In my case, I am satisfied with the steady returns from investing in REIT. However, I feel rather discomfort with the recent volatility in the market, which is affecting the value of these REITs. I am not saying that my reasons for REIT investments are no longer relevant. I just feel that I might have allocate too much of my portfolio to REIT.

On another note, I have been lurking around in the following thread:

Very informative and perhaps I might even adjust my portfolio, base on some of the advices being dished out over there. With a little tweaking of my own of course.

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