REITs is the abbreviation for Real Estate Investment Trust. To the uninitiated, REITs is not something to be feared because once you get all the scary financial jargon out of the way, you will understand how you too can make REITs work for you.
Here are five things about REITs broken down into easily digestible information.
1. REITs investment is straightforward
REITs investment allows you to profit from commercial properties’ rental income. Commercial property types:
- Mixed (combination of the above, may also include hospital, education, business space and plantation)
Each REIT is managed by a Trust i.e. a group of professionals, who make all the big decisions. Multiple properties managed by the same Trust is common. Rental income comes from:
- Retail shops at malls (from H&M to Guardian);
- Office lots at office buildings;
- Medical, logistical, industrial and educational institutions at whole buildings;
- Hotels at hotel buildings;
- and more, as long as they are commercial (not residential) properties.
It’s quite easy to see good-performing REITs in action. Go to any of their properties and see the rate of tenant occupancy. If there are many shops (more than 80%) occupied and many people at the building, that’s a good sign.
The process to add REITs in your portfolio is similar to stocks. Get a CDS account and go from there. See point 4 for more information.
2: REITs from a fundamental analysis approach
Below is an explanation of the difference between fundamental analysis versus technical analysis. An investor can either do one or the other. Which do you prefer?
- Fundamental analysis (FA): Assess factors that make an investment good or bad; suitable for long-term investing.
“I think the property will continue to attract renters and yield a steady passive income because of its proximity to an expanding university.”
- Technical analysis (TA): The type of investment doesn’t matter, the profit potential based on charts does; mainly for short-term trading.
“Based on indicators, there is a strong likelihood that the market will correct itself and the price will decrease therefore I will short X”.
Both FA and TA approaches work, but pick a primary approach because using both can sometimes give you contradicting results and get you stuck in analysis paralysis.
TA is popular among people in forex. By taking the FA approach for REITs, the following must be considered:
- Because e-commerce is growing, REITs that concentrate on retail (i.e. shopping malls) may lose tenants as they can’t compete with online shops;
- Likewise e-commerce is likely to help push REITs in the logistics industry;
- Booming tourism means REITs in the hospitality/tourism sector have a good chance of doing well;
- REITs that include the medical industry might do well as Malaysia is set to be an ageing population by 2030.
The analysis above are examples, there are more things to take into consideration. There is no one correct answer. They can even be personal opinions, but you get the gist.
3. How to select the right REITs
Using simplified fundamental analysis, focus on the following:
- Dividend Yield: Did the REIT yield steady or growing returns in previous years? If yes, that’s a good indicator.
- Growth Potential: Will the rental demand for the properties increase or decrease in five years?
- Related Risk: Is the REIT in a financially stable position? Whatever its asset value, they must have less than 45% debts.
For example, if they manage RM100 million worth of properties, the debt must be less than RM45 million. They also must have a good interest coverage ratio (more than three is good).
4. Where to find information on REITs
- Bursa Marketplace: Go to The Mkt > REITs for a list of all available REITs in Malaysia. Click on each for more info.
- MalaysiaStock.Biz: Go to the Market > REITs and Stock Quote>REITs pages.
- The Complete Guide to REITs in Malaysia by Dividend Magic.
- Which CDS Account to open to start investing in REITs – included in a handy stocks guide also by Dividend Magic.
- REITs’ individual websites: Google their names and their websites should pop up. The website should contain reports, types of properties managed, individuals behind the trust, and more.
5: Which REITs are considered good
This result is based on a small sample size (only 80+ people in the survey), based on the data collected as of April 2017, and heavily biased (as the results pages were constantly refreshed, there is a possibility that survey-takers simply voted on whatever the rest voted).
The top REITs that those in the survey thought might do well, sorted by popularity are:
- Ytlreit/Pavreit (tied)
- KLCC/Mqreit (tied)
Don’t take the results too seriously and do own research. There are only 18 REITs (four Syariah-compliant REITs i.e. KLCC, Alsreit, Alaqar and Axisreit) as opposed to hundreds of stocks, so there is no excuse not to do your homework.
REITs are like the stocks version of properties, so if you like stocks and properties, it might be a good option for you.
The bottom line is – if you think the properties are managed properly (good maintenance, etc) and can attract tenants, it has potential.
Think of it from the tenants’ point of view – “Would I rent here if I have a shop/office?”
This article first appeared in ringgitohringgit.com
Suraya is a corporate writer-for-hire and the blogger behind personal finance website Ringgit Oh Ringgit. She is more of a minimalist, less of a consumerist, a konon DIY enthusiast, a let’s-support-small-businesses-over-big-corporations kinda girl. Prior to her current role, she worked in various capacities within the non-profit industry.