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A Newbie’s Primer to REITs: Why Buy Them?

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Ryan Ong

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By my standards, anything that doesn’t come with at least four walls and a door isn’t property. But it seems most Singaporeans have broader definitions, hence the existence of REITs. This investment choice is a hybrid of paper stocks and property, and it’s popularity is still growing. In this article, I question a REITs investor on the basics: What is a REIT, and why should anyone buy one?

 

What is a REIT?

A REIT is a Real Estate Investment Trust. This is a group of people who pool their money, buy buildings, and then split the rental returns.

On the surface, they’re all landlords and it’s a property investment. However, Edmund Ping, who has been investing in REITs since 2002, says there’s more to it than that:

There are different kinds of REITs, all of which perform quite differently. There are retail REITs, hospitality REITs, office REITs, and so forth. It’s actually a bit more complex than just buying a piece of property and renting it out.”

And if we go into detail on each type, you’ll finish reading this next August. For the purposes of this article, I asked Edmund to simplify.

 

Kid drawing of buildings
“Really Ryan, I don’t know how much simpler I can make this for you.”

 

As you mentioned, a REIT is basically a way for investors to play landlord. There are many kinds of REITs, and they are bought and sold like stocks.

A REIT does not have just one building, it has several property assets. So when you buy shares in a REIT like CapitaMall Trust,  you are buying shares in every single mall that is managed by them. When shop-owners in those malls pay rent, that money is paid to you as dividends.

Different REITs manage different types of property. The better the REIT manages the property, the higher the rental they can charge, and hence the higher your dividends.

So when investors in REITs make their decisions, it is almost like a property decision: We want to pick the REITs that manage top end properties, and avoid the ones with poorly performing properties.”


I know what you’re thinking: It sound complicated. Why would anyone want to do that much homework? Well according to Edmund, there’s a range of benefits:

  • High Dividends and Yields
  • Tight Government Regulation
  • Cheaper Than Buying Property
  • Diversification

 

1. High Dividends and Yields

 

Glasses on stocks spread
How hard can REITs be, right? I mean, the prices only goes in two directions.

 

Regular stocks pay out dividends too. However, the regularity of such payouts seem to depend on performance, the Board of Directors, and three rounds of scissors-paper-stone.

This is not true for REITs,” Edmund says, “Because MAS (Monetary Authority of Singapore – Ed.) requires that REITs pay out 90% of profits as dividends. In fact, this is one of the reasons why REITs have very high yields.

Because the dividend payouts are high, investors in REITs have to come to expect yields of at least 5% to 7%. Sometimes it will hit 9% or more. So if you put $10,000 in a REIT, you can expect maybe $500 – $700 growth.”

However, Edmund cautions that there is a drawback. Like stocks, the value of a REIT can rise or fall. You may not be able to sell REITs at an equal or higher price than you bought them for.

For deeper information on the pros and cons, follow us on Facebook. We’ll have more advanced articles in future.

 

2. Tight Government Regulation

 

Giant stack of books
The summarized regulations alone killed three of our law interns.

 

Singapore REITs (S-REITs) are subject to different regulations from REITs overseas. Almost all the restrictions help to safeguard investors.

In Singapore, the ‘gearing’ of a REIT can only be 35%. Gearing is something like the loan-to-value ratio when you buy a house,” Edmund says, “Basically, it means REITs cannot be over-leveraged; they cannot borrow too much money to buy buildings, so there is little risk of bankruptcy”.

Edmund also mentions that S-REITs have a tight cap when it comes to developing property. They can only develop property with value under 10% of their existing holdings:

We call this greenfield development. It is so restrictive that many REITs will not even consider it. This is actually a good thing for investors, since if a REIT branches out into property development, you’re dealing with a whole other field of variables. S-REITs are kept very focused and simple, away from such activities.”

A quick note: I checked around and found  REITs can actually have a gearing of up to 60%, but only with accreditation from a recognized credit agency. Otherwise the default limit is 35%.

 

3. Cheaper Than Buying Singapore Property

 

Singapore HDB
Note: Sub-header also refers to 90% of everything on the planet.

 

This is probably the most obvious advantage of buying REITs. Edmund says that:

Most investors I know started with $10,000 or more, but you can start with less. I think that at present (Dec 2012), REITs are a very prudent choice.

Property prices are through the roof right now. Even if you have the capital to buy a house, you have to ask yourself if this is really the best time. If you are wrong and you’re buying at a peak, you stand to make a significant loss.”

 

4. Diversification

 

Broken egg
I notice all your eggs were in one basket. So I took them out and put one on the floor, one on the TV, one on the…

 

As mentioned above, buying shares in a REIT means investing in several buildings. This provides protection through diversification:

If you buy property, you are banking on the performance of one unit, in one location,” Edmund says, “And a number of things can mess up your investment.

Maybe another condo goes up, and it blocks your condo’s sea view, like the Costa Del Sol and Bayshore incident. Or maybe there is some renovation, and suddenly your office space is too noisy to let out. So many things can go wrong.

But a REIT manages a few hundred or a few thousand units. Even if rental yields go down in one unit, they may go up in another. Just like in stocks, it’s secure because all the eggs are not in one basket.”

 

Image Credits:
williamcho, sanbeiji, Iman Mosaad, Unhindered by Talent, abdul / yunir, TalAtlas

Do you invest in REITs? Comment and tell us your experiences! 

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Ryan Ong

I was a freelance writer for over a decade, and covered topics from music to super-contagious foot diseases. I took this job because I believe financial news should be accessible and fun to read. Also, because the assignments don't involve shouting teenagers and debilitating plagues.