A rundown on real estate investment trusts
Real estate has been a prominent addition to portfolios for a while now, with various property-related financial products and solutions to choose from. REITs, or real estate investment trusts, are one such popular option.
A REIT owns and oversees commercial real estate that generates revenue, such as shopping complexes, hospitals, plantations, industrial properties, hotels, and office blocks.
A REIT’s management business is allowed to deduct shareholder distributions from its corporate taxable income. However, for it to benefit from this tax-free status, the majority of its assets and income must be related to real estate, and it must distribute at least 90% of its total income to investors and unit holders yearly.
REITs are based on mutual funds, combining the capital of many investors and letting individual investors benefit from income derived from property investments without actually having to invest in, manage, or finance any real estate.
There are three types of REITs:
1. Mortgage REITs
These provide money to property owners and managers directly through mortgages and loans, or indirectly by buying securities that are backed by mortgages.
What ultimately drives their earnings is the net interest margin – the difference between the interest they receive on mortgage loans and the cost of funding these loans. This model suggests that they might be vulnerable to rising interest rates.
2. Equity REITs
Most REITs are equity REITs, which own and operate properties that generate income. Rent is the primary source of income, as opposed to reselling properties.
3. Hybrid REITs
These use both equity and mortgage REIT investment strategies.
Core differences
- Equity REITs acquire and manage real estate assets that generate revenue.
- Mortgage REITs involve the owners of mortgages on real estate.
- Hybrid REITs combine the traits of equity and mortgage by owning property and holding mortgages.
How to invest in REITs
1. Select a brokerage company
Choose a dependable brokerage company by looking through the Bursa Malaysia website. Pay attention to commission costs, convenience of transactions, syariah compliance, and user-friendliness of the broker’s preferred online trading platform.
2. Create a CDS and trading account
Make an appointment to open a central depository system (CDS) and trading account with the broker of your choice. You are usually required to submit paperwork, including copies of your identification and bank statements.
You’ll receive instructions on using the online trading platform from your broker as well.
3. Fund your trading account
Opening an account takes a few days. Upon activation, you can start adding money to the online trading platform. Fund your account in accordance with your financial situation.
4. Start investing
If you have enough money in your trading account, you may now use the online trading platform to begin investing in REITs.
Owing to their potential for providing a solid, consistent annual dividend as well as the possibility of long-term capital growth, REITs can be a significant part of an investment portfolio. But like any other investment, REITs have benefits and drawbacks.
Pros
- REITs are simple to buy and sell because they often trade on public markets, which helps offset some of the traditional real estate problems.
- They deliver consistent cash flow and enticing risk-adjusted returns in terms of performance.
- A real estate holding benefits a portfolio as it offers diversification and dividend-based income, with payouts frequently bigger than those of other investments.
Cons
- REITs don’t offer much in the way of capital growth, as they are required by their organisational structure to return 90% of income to investors.
- Some REITs have substantial management and transaction fees, and dividends are taxed as normal income.
You might have some information about a REIT, but it might not give you the whole or final picture by itself. Sometimes the info might be inconclusive; for example, when one valuation metric shows the REIT is underpriced, while another says it is costly.
Finding a REIT that performs exceptionally on every test is uncommon, so gather all the data and weigh the advantages and disadvantages. You must take into account all of the metrics at once to see how they all fit, because each one only contributes a small amount to the total picture.
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