Investment in REITs cost a fraction of the cost of direct investment in real estate. You can start off with a minimal investment outlay.
REITs are more liquid compared to physical properties. Shares of publicly-traded REITs are readily converted to cash as they are traded on the stock exchange.
REITs tend to pay out a steady dividend, which is derived from existing rents paid by tenants who occupy the REIT properties.
The benefits of the real estate are derived on a pro-rated basis through a REIT.
REIT properties are managed by professionals who will add value for a higher yield, benefiting investors in the long run.
The total return of a REIT is subject to the performance of the property market. Hence, the unit price of a REIT may go down if its underlying properties drop in value.
Investors will not have direct control over the management company’s investment decisions like when to buy or sell certain real estates, or how they will be managed.
REITs are also subject to market demand and supply. As such, market fluctuations, confidence in the economy and changes in the interest rates may affect REITs price.
Management quality and corporate structure of the REIT, in particular the REIT manager (good track record and reputation).
Investment objective and strategy of the REIT.
Quality of the real estate, including factors such as mortgages, occupancy rates and geographical locations.
Distribution policy and tax rules.
Income distribution based on the distribution policy stated in the REIT's deed; and/or
Capital gains which may arise from appreciation of the REIT's price.
The yield is normally published in the business section of major daily newspapers. It is derived from the following formula:
|Distribution yield =||Income distribution paid to a REIT unit holder|
|REIT's price paid by the unit holder|
|(or the prevailing market price of the REIT)|
Other indicators include the following which are available in annual reports:
The value of a REIT is based on its tangible real estate holdings. This is calculated by the total assets of a company after subtracting all its liabilities.
The percentage of operating expenses (management fees, etc.) incurred to the NAV.
The change in a REIT's price for the period under review plus any income distribution received during the period.
|Type of property||
|Earning Profile||A REIT is driven by recurring rental income||A property company seeks a combination of property sales, development profits, rental income and property investments|
|Capital Structure and Cash Flow||A REIT has low and defined level of retained earnings, low debt level defined by the regulators and strong cash flow from operations||A property stock has a high gearing ratio due to high capital expenditure required for property development and sometimes negative cash flow; and low dividend payouts|
|Dividend Distribution Policy||A REIT will distribute 90% – 100%of its retained earnings before tax||A property stock has no certainty of a dividend payout|
|Risk Profile||A REIT is a low risk, passive investment vehicle with a high certainty of cash flow from rentals derived from lease agreements with tenants||A property stock has a high development and financial risk|
|Corporate Governance||REITs are governed by multiple layers of stakeholders – unitholders, manger, trustees, regulating authorities ensuring that interest of minority unitholders are protected||A property stock is often dominated by a controlling shareholder which raises conflict of interest issues with minority shareholders|