What is a REIT
A Real Estate Investment Trust (REIT) is an investment vehicle that invests in a pool of real estate assets. These assets generate revenue by collecting rent from the tenants. Typically, 90% of the profit after deducting expenses and manager fees is then distributed to REIT unit holders on a quarterly or half yearly basis.
5 reasons to invest in REITS:
1. Offers you a better return
The average yield of the Singapore REITs and property trusts is 6.4% which is much more attractive compared to the 10 year government bond of 1.8%. Fixed deposit and interest rates are not indicated below but if you google for the current rates, it is around a meagre 1% or less.
REITs also provide a good hedge against inflation with a yield spread of about 4.3% (Reits average yield at 6.3% minus MAS core inflation rate at 2.1%).
Source: SGX Research Chartbook (SREITS & Property Trust)
2. Easier to understand as compared to stocks
If the REIT own local assets, you could do a physical viewing of the properties. Take for example, if you invest in a retail REIT like Frasers Centrepoint Trust that owns local shopping malls such as Causeway Point and Northpoint City North Wing amongst many others, you can frequent the malls during the weekdays and weekends to observe the footfall. A crowded mall would mean the shop owners or tenants are doing well as shoppers are consuming their services or purchasing goods from them. The tenants will in turn be able to pay their property rental which flows into income for the REIT unit holder.
Besides physical viewing of the properties, you should look at the financial ratios of the REIT such as occupancy rate of the property and the rental reversion (A metric captured by some REITs to show whether new leases signed have higher or lower rental rates than before) that is normally found in their annual reports and quarterly presentation slides to help to gauge if the properties are sought after. Other critical financial factors like the gearing of the REIT, cost of debt and land lease of the assets should be found in their presentation slides as well. Studying these factors are even more paramount if the assets own by the REITs are situated overseas.
In comparison, there are more variables in assessing a stock. Potentially, there are a lot of competitors and more disruptions to the business model. Like how Google disrupt Singapore Press holdings, Tik Tok compete with Facebook and Grab with conventional taxi companies such as Comfortdelgro.
3. Tax-exemption
A REIT listed on the Singapore Exchange is exempted from tax by Inland Revenue of Singapore (IRAS) under the tax transparency treatment as as long as the REIT distribute at least 90% of their income each year. Unit holders will benefit as this will lead to a higher distribution income for them.
4. Professionally managed
Within a REIT structure, there are conventionally a REIT sponsor, Trustee, a REIT Manager and a property manager. The presence of the REIT manager is to set and execute the strategic direction of the REIT. It is responsible for the acquisition and divestment of the property. It usually appoints a property manager to rent out and maintain the property. Investors do not need to worry about the upkeep and daily maintenance of the property in contrast to owning a physical property like a condominium or commercial office.
A good REIT manager with a strong sponsor will also help to grow the REIT by making acquisitions that are Distribution per Unit (DPU) accretive. Investors will thus have an increased yield on the cost of their REIT investments.
5. Liquidity
You can buy and sell units of a REIT easily as they are traded on the Stock exchange. Whereas for a physical property, it can take months to find a willing buyer or a seller, not mentioning the substantial commissions, fees and taxes involved in the transaction.
Disclaimer: I own units of Frasers Centrepoint Trust.