Monday, November 9, 2009

Intro to REITs Investment

What are REITs?
REITs stand for Real Estate Investment Trusts. They are specialized companies that invest in commercial, industrial, residential and healthcare real estates. Examples on the Singapore Stock Exchange includes CapitaCommerical Trust (Commercial), Cambridge Industrial REIT (industrial), Saizen REIT (residential) and Parkway Life REIT (healthcare). These companies buy and manage properties including shopping malls, offices, hotels, hospitals.

REITs usually pay a generous dividend because they are required by law to distribute most of their earnings to shareholders. In exchange, they receive tax incentives.

Perhaps, we can view REITs as an instrument to buy and own a small portion of a property, while at the same time shared fundings with many other shareholders to employ someone to manage that piece of property. With REITs, we can invest in real estate with no leverage, no property and no need for any stress in finding tenants and collecting rent from them.

REITs investment generally focus on dividend yield. Also, like any stocks on the exchange, investing REITs can also result in capital gain. The same can be said of investing in real properties. However, because REITs are traded on the stock exchange, it's liquidity is much higher than the actual property itself.

So how do we choose what types of REITs to invest in? I'm not an expert in it, but I shall share some basics of what I think.

The factors that are important to me are:
1) Dividend yield with regards to current stock price, as with how we choose most dividend stocks
2) Gearing
3) Growth potential
4) Sector
5) Sponsor/Backer

1) Dividend yield
Basically, I will be happy with any dividend yield from 6~8% considering that I do not need to actively monitor the stock price. Choosing and buying those with dividend yield of >6% will mean that should anything unforseen occurs, a reduction in DPU would perhaps still beat putting the money in the bank anytime. Of course, reduction in DPUs would likely bring about a drop in the share price as well till the dividend yield is back to the 'acceptable' range. This should not matter if we are taking a longer term investment view as the dividends would eventually pay itself off.

2) Gearing
With the recent credit crisis, there are companies who have to stop dividend payouts, do placement, issue rights, etc, in order to remain in business. If the gearing is low, refinancing of debts is usually a problemless affair. However, if the gearing is high, as in Saizen REIT and Rickmers Maritime, the ability to refinance debts at critical juncture is hampered. The ability to remain as a going concern would be cast in doubt, and this would make it even harder for refinancing.

3) Growth Potential
A REIT which is actively, but conservatively, acquiring properties would in the long run benefit the shareholders with increasing NAV and increasing dividend yield.

4) Sector
The different sectors mentioned earlier, commercial, industrial, residential and healthcare are different in nature. Industrial and healthcare related properties are usually more defensive in revenue, hence the dividend yield would be more consistent. For commercial and residential sectors, the rents could vary more as the tenants are much more mobile. Hence, the dividend yield could fluctuate. However, for the risk, the yield is usually higher.

At the moment, for REITs, I have only CapitaCommercial Trust and Starhill Global REIT, both in the commercial sector. I hope to eventually include the other 3 sectors so that there will be some diversification.

5) Sponsor/Backer
A strong sponsor like Temasek Holdings, Capitaland, or YTL Corporation would be key to the success of the REIT in refinancing its loans.


  1. I find your blog very well-written, routinely updated, keyword-oriented and incredibly useful. You have very rich posts that really interests to many readers. I really appreciate your work.

  2. Hi Cristine,

    thanks for visiting! :)

  3. I would like to suggest a real estate Investment company that owns prime retail shopping malls all over the world. Its called Westfield.

  4. REIT's are an excellent way to invest in brick and mortar buildings. REIT's are also a great hedge against inflation because you own real estate which is a hard asset. Along with all this theirs usually a decent dividend that goes along with REIT'S.

  5. Investing in Singapore REITS is one of my best move for retirement. Quarter dividend payouts excite me too.


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