Why you should invest in Real Estate investment trusts

Sick and tired of lousy interest rates from your fixed deposits? Consider Real estate investment trusts instead! It combines the best elements of investing in a property and a stock and offers investors a higher and predictive yield. Interested? Read on further ^^

Further Disclaimer: The article below is intended for informative purposes only. It is not an inducement or offer to invest in reits or securities. Interested readers should consult their financial or professional advisers for more information if in doubt.

Why Reits are a smarter way to invest in property

Written by Shade

With the launch of the first Reit, Capitamall Trust, way back in 2002 and the establishment of a regulatory framework, Reits in Singapore has been gaining popularity steadily ever since. At last count,there are 18 reits listed on SGX amounting to a total market capitalization of approximately more than 24 billion SGD.

Why the huge demand for reits? There can be many reasons for this, but the main reasons are attributed to a growing class of investors who demand a steady and predictable form of investment and property investors who favour liquidity as opposed to illiquid property investment.

There are 3 main benefits in investing in reits as opposed to direct property investment. These are liquidity and affordability, diversification and leverage, predictive distribution yields and Asset management expertise of the manager.

A reit offers the benefit of liquidity to investors as it is listed on a stock exchange, thus, this gives it access to a wide public market. This gives investors the assurance of a “ready buyer, ready seller” and minimizes the risk of investing.

Reits are also affordable to most investors as the capital required is usually within their means and there isn’t a minimum sum. You invest what you can afford and there isn’t a need to get a loan from the bank to finance your investment, simply put- it is not capital intensive.

A common huge risk undertaken by traditional direct property investors is the lack of diversification and the cost of non leverage. A direct investment in property is capital intensive and lacks leverage. Reits linked up various properties and introduce leverage while effectively managing the risk of diversification.

An example of a diversified reit would be Capitamall Trust. The reit owns a total of 9 properties in both prime and suburban areas of Singapore. Should 1 property be underperforming in terms of rent accruement, the other properties in the reit would be able to cover the shortfall.

Lastly, it has been shown that many investors, especially those in their retirement years, prefer to invest in a stable and predictive form of investment where they are guaranteed a regular payout. Typically, a reit usually pays out at least 90% of its distributable income to unitholders. The average yield of Singapore reits is approximately 4.5%. Investors would no doubt find this attractive. Reits are also known to be less volatile as compared to stocks.

However, this is not to say that reits have no downsides. As to any form of investments, reits also carries risk and are naturally exposed to the cyclical nature of the stock market and the property industry. Should the property industry take a downturn, rental yields from the property held by a reit would decline and this would have a negatve impact on the distribution to unitholders. The Net asset value of the reit could also be affected in a property downturn and this would affect unitholders who may have invested in the reit above the issue price. There may also be the issue of unitholders having to rely solely on the competency of the asset manager. And should the asset manager fail to improve returns of the reit, the value of the reits may fall.

The above risks, however, can be mitigated by effective active asset management by the reit manager. Reits are usually structured in a manner where the interest of the unitholders is closely aligned with that of the manager. Performance fees would be paid to managers should they be able to procure high returns to unitholders, and as such, they would be motivated to the best of the ability to generate high returns.

The Property industry in Singapore is peeking again and is set to grow further in the coming years. Tax free distributions of reits has also helped spurred the number of reits listing on the stock exchange. With an ageing population, the demand for reits is set to rise.

With such bullish factors for the local property sector and more new and exotic listings coming in the future, the time may just be right to make an investment in a reit.