Investing in REITs a safe bet

REITs are generally low-risk but offer stable dividend yields, making them perfect for beginners in trading

by FARA AISYAH/ pic by TMR FILE

IT’S all about real estate, people say. Real estate investments have created 90% of the world’s millionaires over the past centuries.

Even multinational fast food chain McDonald’s (McD) is in reality a brilliant real estate company. Many think McD profits from selling burgers and fries, but the company actually makes money by buying properties for its outlets and leasing them to franchisees.

McD outlets are located at prominent addresses worldwide. In Kuala Lumpur alone, there are McD branches at Jalan Bukit Bintang, Berjaya Times Square, Suria Kuala Lumpur City Centre (KLCC), KL Sentral and NU Sentral, for starters.

As interesting as it sounds, it’s not easy to invest in prime real estate without big capital.

However, investors looking to benefit from the real estate boom can look at real estate investment trusts (REITs) as a cheap entry point instead of having to cough up vast sums of money to buy the physical properties.

What are REITs?

In a simple definition, REITs are publicly listed trust units that are bought the same way one buys shares of listed companies.

REITs have their own index, known as the Bursa Malaysia REIT Index. REITs own properties such as shopping malls, office towers, warehouses and hospitals, and investors who have holdings in the REITs are entitled to dividend the REITs pay from revenues or rentals they make from tenants and clients.

REITs are generally low-risk but offer stable dividend yields, making them perfect for beginners in trading.

They also come with government-initiated tax incentives aimed at promoting REITs in the capital market.

One huge tax benefit of a REIT is that most of the income earned by the trust is exempt from income tax.

To maintain their REIT status, trusts must distribute at least 90% of their taxable income in the form of dividends.

By doing so, they will not be levied the 25% income tax, which allows them to distribute their income on a gross basis.

In addition, REITs do not have to pay the real property gains tax when disposing of their assets.

Why Invest in REITs?

The number one reason to invest in REITs is because the trusts are professionally run by managers, Areca Capital Sdn Bhd CEO and ED Danny Wong said.

“REITs are much more affordable and very liquid compared to property investments. Compared to equities, REITs are less volatile.

“As REITs are listed on the FTSE Bursa Malaysia KLCI, you more or less can predict the trust’s direction,” he told The Malaysian Reserve (TMR).

Wong likes retail REITs, citing KLCC REIT and Pavilion REIT as examples.

Aberdeen Standard Investments (M) Sdn Bhd country head Gerald Ambrose concurred that trusts such as KLCC REIT and IGB REIT are successful as their retail properties are of good quality.

“However, some of the retail REITs are struggling due to the development of e-commerce which leads to lower rentals and tighter competition in the sector. In addition, there’s an excess of supply of commercial properties in the Klang Valley.

“Due to the expansion of e-commerce, REITs involved in logistics and warehouses are seeing increases in revenue as they are getting good rentals,” Ambrose told TMR.

He cited Axis REIT, which has 16 logistics and warehouses in Selangor, Penang and Johor, as an example of a successful REIT during tough market conditions.

Earlier this week, Axis REIT announced its proposed acquisition of an industrial land in Nilai, Negri Sembilan for RM50 million, which analysts deemed positive.

REITs in the Near Future

The Bursa Malaysia REIT Index is expected to rise as Bank Negara Malaysia is anticipated to cut the Overnight Policy Rate (OPR) again in November.

The last rate cut in May has improved the growth of the index, Wong said.

“The lower OPR has boosted returns for REITs, therefore, investors who are hungry for yields will go into REITs for investments.

“Looking at the index, it still has room to grow as another rate cut is expected by year-end,” he said.

Ambrose believes the growth of REITs in Malaysia and other countries are generally a result of the performance of other sectors in capital markets.

“With the interest rates being brought down recently and a huge chunk of bonds in Europe having negative yields, among others, people start to look into REITs which have visible dividends and yields.

“It’s quite possible the OPR will be cut again this year, and when that happens, people will invest in REITs and usually, the price of REITs will go up,” he said.

The Bursa Malaysia REIT Index heading for the best year in at least a decade, having climbed 6.9% since the start of the year.

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