REIT stands for Real Estate Investment Trust is one of the most sought investment instrument in Malaysia. Investors are always in search of an investment instrument that will generate revenue for their investments. This article will help you understand the complete mechanism and working of REIT in Malaysia.
What is REIT Investment?
Real Estate Investment Trust is an investment tool that is similar to mutual funds but the only major difference is that REITs does not invest the investor’s money in stocks, shares etc instead it invests the investors money in real estate, either residential or commercial. The REITs allows investors to indirectly invest their money in real estate i.e. properties.
How Does REIT Investment Work?
Real Estate Investment Trust is a public listed company that offers the opportunity to investors to invest their money in real estate. These public listed companies invest the money received from their investors (shareholders) for acquiring and running profit-making properties. The profit received by the company by acquiring and running properties by way of rentals is then distributed amongst the investors by way of dividend.
The working mechanism of REITs is where the investment comes from the investors who buy shares of REITs companies and further the REITs companies invest the collected pool of money from investors in buying real estate properties and then these properties are further rented out to generate profit in form of rentals.
There are several types of REITs investment instruments available in Malaysia. Depending upon the financial goals an investor can choose to buy the REITs instrument. There are various types of REITs companies in Malaysia that invest the money in various real estate properties namely apartments, hotels, malls, hospitals, shopping malls, office spaces, and warehouses.
Investors depending upon their choice and financial goals can invest their money in the REITs company that deals in the above real estate sector and be able to reap benefits by investing their share of money in the above listed REITs i.e. real estate properties.
Some of the properties under the REITs include one real estate property that is rented out or has a combination of more than one real estate properties like hotels, commercial office spaces and warehouses or hospitals and shopping malls.
History of REITs
Investing in Real Estate Investment Trust companies is a type of alternative investment where the investor is investing in the underlying product in an indirect manner. This concept of investing in the pool of money in real estate was first introduced in the United States of America in the year 1880. The reason behind the introduction of this investment instrument was to allow investors to avoid the double taxation net on business investments which was prevalent in the USA during those years.
Another important reason behind the introduction of REITs was that it allowed small investors to invest their money in large-scale businesses thus breaking the age old norm of control only by rich and big corporations.
History Of REITs In Malaysia
Malaysia witnessed the dawn of REITs during the year 2005, but investing in REITs caught up trend not until 2011. Malaysia witnessed the full potential growth of REIT after the economic crises of 2008-2009. Investing in REITs was a profitable proposition after the economic setback faced by stock markets in the year 2008-2009 caused due to US subprime mortgage crises.
Investment in the REITs sector has shown consistent upward returns to the investors and has offered a good return on investment to investors.
What Are The Benefits Of Investing In REITs?
We now know that REITs is an investment instrument that pools monies from investors and invest it real estate ventures. Let us understand the benefits of investing in REITs:
1. Accessibility: REITs gives the opportunity to investors whether big or small to invest their money in real estate ventures which is otherwise a costly affair. REITs gives accessibility to investors to participate and invest their money in real estate directly even with small investment amount. Investing in REITs allows owning of a piece of prime buildings / land in proportion to the shares held by the investors.
2. Liquidity: REITs offer the highest liquidity as they can easily be sold and converted into cash. Holding shares of REITs is beneficial as compared to holding a piece of land as it is very easy to sell the shares and fulfill the need of cash as compared to selling a house.
3. Regular Income: Rental incomes received on real estate properties are distributed as dividends to share holders so there is a persistent flow of income. The investors shall receive dividends as the real estate properties shall earn rentals on a regular basis.
4. Professional Management: the portfolio of the REIT investment instrument is professionally managed who offer services to add value and earn a higher yield on the investor’s monies. REIT makes it easy for investors to manage their investment and help them earn higher returns on their investments.
5. Pocket Friendly: Investing in REIT is cheap as compared to investing directly in the real-estate property because REIT allows investors to invest with fairly low entry cost rather while investing directly in real-estate property result in burdening oneself with loan repayment.
6. High dividend payouts: REIT companies are usually obligated to pay a minimum of 90% of its net profit as a dividend to shareholders in order to be exempted from corporate tax. Therefore, REIT stocks often provide investors with higher returns in the form of dividend payouts.
Thus by looking at the benefits of the Real Estate Investment Trust it can be easily concluded that investors shall reap immense benefits and returns by investing in REITs. Following is the Comparison between investing in REIT and investing in Physical property that will help you understand the benefits of choosing REIT over physical property.
Investment in REIT
Investment in Physical Property
The returns yield i.e. dividend earned by investing in REIT is around 5% to 7%
The return yield i.e. the rental yield earned on the property is around 3% to 5%
The REIT investment instrument is very liquid in nature i.e. it can be easily converted into cash
Physical Property is illiquid in nature as compared to REIT
The transaction cost for purchase or sale of REIT is very low and the entire process is simple and quick
The transaction cost of buying a property is high and at the same time very time consuming
The portfolio of the REIT investment instrument is managed by professionals
Physical properties are usually self-managed
REIT allows investors to diversify their risk by investing their money in different real-estate properties
Very little scope for Diversification of risk and money
What Factors Investors Must Consider Before Investing In REIT?
All investments are subject to certain terms and conditions. Every investor must look into the best deals to make the most from their REITs investments. Here is a list of certain factors that every investor must look for before investing:
1. Firstly, look for a good performing REIT which pays an increasing dividend to the investors i.e. shareholder. Investors are suggested to look at the past dividend payout records of the REITs. If the REIT is not paying an increasing dividend on the investment then it is suggested that investors must reconsider their decision of investing in that REIT.
2. Secondly, a REIT should be a performing investment tool i.e. the number of assets and net rentals or profits receivable by the REITs must be increasing every year. It is best to invest money in performing REITs as it results in increasing dividend payout to shareholders. Avoid investing in non-performing stagnant REITs.
3. Thirdly, verify whether the manager of the REIT is competent to handle the investments of the investor. As one of the primary responsibility of the manager is to improve the performance of the REIT portfolio by adding new assets and improving the existing assets in order to improve and increase the rentals or profits every year.
4. Before investing in particular REITs it is important to understand whether the real-estate properties are located at strategic locations and whether they are in pristine conditions as these factors aid to increase in the rental amount. Thus it is very important for the investor to check the location of the property, the condition of the property, attractive to customers or not etc. For example if an investor is interested in investing in a REIT of a warehouse, it is important to check whether the warehouse is fully equipped with safety features for protection of stored goods, the strategic location of the warehouse and whether the warehouse is having good connectivity to major transportation means.
5. One of the major aspects to determine the success of the Real Estate Investment Trust is by looking at the permanency of the businesses who rent the property in which the money of shareholder is invested. Long term tenancy is an important factor for the success of REIT. So avoid investing in REIT who is renting their real-estate properties to tenants who have high chances of leaving the rented space in short-duration.
6. Another important factor for the success of the REIT is the availability of a variety of tenants because to pay the dividend to shareholders it is important for the real-estate property to be continuously occupied and functioning. Thus the REIT should have the ability to run business and not depend on one particular tenant for its working.
Thus an investor must consider the above stated facts before deciding and investing in a particular REIT as it will help the investors make a wise and informed decision and reap profitable benefits from their investments.
How To Invest In REIT In Malaysia?
Trading of REITs in Malaysia is easy. Investors can invest money in the publicly listed REIT. The REIT is traded on the stock exchange and the buying and selling of REIT are similar to buying and selling of shares or stocks. The trading of REIT is done on the stock exchange and can be traded with a broker.
If an investor is interested to invest in a REIT which is not traded on the stock exchange then such investments can be done with the help of brokers.
REIT investment in Malaysia can also be done by purchasing REIT mutual fund units or a REIT Exchange Traded Funds. There are certain fees and taxes that investors need to bear in order to invest in REIT Malaysia as under:
2. The non-traded REIT is sold by a broker or financial adviser who charges upfront fees on the purchase transition. Investors have to pay the upfront fees and the sales commission while purchasing non-traded REIT.
3. The tax liability lies with the investor as they are responsible for payment of taxes on the income received in connection with REITS namely dividend or any capital gain.
Name of the REIT
REIT trading short name
Particulars of the Portfolio
Amanah Harta Tanah PNB
Retail properties & Office spaces
Al-Aqar Healthcare REIT
Healthcare spaces like hospitals, clinics, etc and Hotels
Office spaces and Industrial Spaces
Office spaces, Retail Properties, and hotels
Amanah Raya REIT
Industrial Spaces, Office Spaces, Hotel, and Retail properties
Industrial spaces, Warehouses, and Office Spaces
Industrial spaces, Warehouses, and Office Spaces
Capital Malls Malaysia Trust
Retail spaces and Hotels
Retail spaces and office spaces
Retail spaces and office spaces
Quill Capita Trust
Commercial, Carparking lots, Office, Industrial spaces
Retail spaces, Hotels and office spaces
YTL Hospitality REIT