What is a REIT?

A Real Estate Investment Trust (REIT) is a fund or a trust that owns and manages income-producing commercial real estate (shopping complexes, hospitals, plantations, industrial properties, hotels and office blocks).

A management company for a REIT is permitted to deduct distribution paid to its shareholders from its corporate taxable income. However, to enjoy this tax-free status, the REIT must have most of its assets and income tied to the real estate and distribute at least 90% of its total income to investors/unit holders annually.

What does a REIT represent?

• Equity ownership

• Indirect access to large, stable estate portfolios in a tax efficient manner

• Tax efficiency – investors are only taxed once

• High corporate governance – REITs are governed by a Trust Deed as well as the stock exchange and the securities commission regulations, which define the operating procedures and ensure a high level of corporate governance

What are the benefits of investing in listed REITs?

• Affordability: Investment in REITs cost a fraction of the cost of direct investment in real estate. You can start off with a minimal investment outlay.

• Liquidity: REITs are more liquid compared to physical properties. Shares of publicly-traded REITs are readily converted to cash as they are traded on the stock exchange.

• Stable income stream: REITs tend to pay out a steady dividend, which is derived from existing rents paid by tenants who occupy the REIT properties.

• Exposure to a large-scale real estate: The benefits of the real estate are derived on a pro-rated basis through a REIT.

• Professional management: REIT properties are managed by professionals who will add value for a higher yield, benefiting investors in the long run.

What are the risks involved when investing in REITS?

• Returns are not guaranteed: The total return of a REIT is subject to the performance of the property market. Hence, the unit price of a REIT may go down if its underlying properties drop in value.

• Loss of control over investment: Investors will not have direct control over the management company’s investment decisions like when to buy or sell certain real estates, or how they will be managed.

• Market factors: REITs are also subject to market demand and supply. As such, market fluctuations, confidence in the economy and changes in the interest rates may affect REITs price.