Why Invest in REITs?

Real Estate Investment Trusts or simply REITs are listed companies that buy, rent out and manage properties. REITs lease out spaces and collect rentals from their tenants which is then pay out minimum 90% of taxable income as dividend to its shareholders, either quarterly or semi-annually.

If you have not heard about REITs before, then let me give you some examples:

Westgate, Plaza Singapura, Bugis+

Causeway Point, Northpoint City North Wing, Changi City Point

Bugis Junction Tower, Marina Bay Financial Centre, One Raffle Quay

CWT Commodity Hub, Pandan Logistics Hub, DHL Supply Chain Advanced Regional Centre

Mount Elizabert Hospital, Gleneagles Hospital

Crowne Plaza Changi Airport, Mandarin Orchard Singapore 

You could also see a lot of industrial building owned by Ascendas and Mapletree across Singapore, see whether do you recognize the following logo.

 

Now you should have a clearer picture, REITs properties are are all around us. Many REITs have oversea properties as well, which provide geographical diversification. However, this also means that  foreign currency risk is there, currency hedging could not provide protection for long term down trend.

You never thought REIT is so close to you?

While REITs business model is similar to investing in brick and mortar properties for rental, there are some pros and cons that you should consider:

	SREITs	Physical Properties
Advantages of SREITs
Affordability	Could invest as low as S$100	Require high initial capital for down payment, legal fee, stamp duty, etc.
Diversification	Multiple properties, some REITs own properties in multiple sectors and countries	Own a few to most a handful of residence or commercial properties. Unlikely to own hospital, hotel, office building or retail mall
Properties Management	Managed by professional	Self-manage
Liquidity	Traded through stock exchange	Buy or sell process take months to process
Transparency	Information available online	Information not always available
Yield	5% to 9% dividend yield, not subjected to income tax	2% to 4% rental yield after minus off interest paid, maintenance fee, property tax, income tax, etc.
Monthly Commitment	No	Monthly mortgage payment
Disadvantages of SREITs
Capital Gain	Modest, as REITs distribute 90% of taxable income and leave only maximum 10% to grow	Potentially higher (do consider costs like interest, taxes, fees when calculate gain)
Properties Control	Decision control is with REITs manager	Full control
Volatility	Price subjected to market volatility	Stable, unlikely to have big changes in short time
Income Stability	Fluctuate	Stable
Income Frequency	Quarterly or semi-annually	Monthly
Share Dilution	Private placement, preferential offer and rights issue cause share dilution	No

For rental yield of properties, you could refer below detail post by others:
Calculate Rental Yield in Singapore: A Quick and Simple Guide
Your REAL Rental Yield in Singapore is likely ZERO
Considering most purchases of physical properties are leveraged, which means monthly mortgage payments should be added into capital when calculating rental yield. Correct me if I am wrong, the rental yield is maximum at beginning due to lower capital and minimum upon fully paid up.

Some would suggested to invest in Malaysia properties for rental and capital gain. However, profit from property investment is not simply buy price minus sell price. With interest rate of 4.5%++ plus expenses like maintenance fee, taxes, legal fee, stamp duty and others, will your property gain be able to cover all costs? Below snapshot from home loan calculator, adjusted for easier viewing:

RM500k loan cost RM 108k in 5 years and RM 412K in 30 years

Now let's back to why personally I prefer REITs:

i) Low Capital Requirement 
Not all of us are born with silver spoon, nor all of us having extra high monthly income. So it would be normal to take few years to build enough capital for initial payment of one property. With REITs, I could do it with small amount.

ii) Diversification
This actually link to the above low capital requirement. Due to restriction in capital, I could only own a few properties in my life time. Let's say I own 2 investment properties, 1 vacant means 50% occupancy and rental income will drop to 50%. For REIT this would not happen as they own multiple properties and have multiple tenants.

iii) Hassle Free
I am a lazy person and I heard lots of terrible stories about bad tenants. So properties and tenants management by professional is another big plus to me. REITs dividend would also directly bank into my account, on time.

iv) Monthly Commitment
No burden on monthly mortgage payment, I could invest REITs as and when I like. Without commitment, we have the flexibility to quit job that we hate, right? Of course, this is provided we have enough emergency fund and dividend which could cover some of our monthly expenses.

Not a fan of monthly installment commitment burden

Given the advantages above and the fact that I can't really afford property investment, I will go for REITs. However, I might be missing out important points for property investment, I believe there are still many peoples who have earned a fortune from property investment. Just make sure you have done detail research and calculation before you dive into it.