Introduction

REITs are a great way to invest in real estate without having to directly manage the property. Investors can invest in a variety of property types, including office buildings, retail centers, warehouses, storage facilities, and hotels. REITs are an investment vehicle that provides an opportunity for small-time investors to buy into commercial, retail and luxury real estate such as hotels and malls at an affordable price. With regular dividends and capital gains, it can help investors to build their dream portfolio.

Key takeaways

• REITs allow individual investors to get involved in income-generating real estate projects without having to put up a large amount of money for the initial investment or down payment.
• REITs are professionally managed and can provide quarterly or semiannual distributions of income from the assets.
• REITs offer several advantages as an investment, including being listed on Bursa Malaysia and having high liquidity. This means investors can convert their assets to cash relatively quickly and easily, compared to physical real estate investments such as houses.

What are Real Estate Investment Trusts?

Real estate investment trusts (REITs) are investment funds or trusts that own and manage commercial real estates properties, such as shopping complexes, hospitals, plantations, industrial properties, hotels and office blocks. (Bursa Malaysia)

REITs allow investors to pool their money together to invest in real estate ventures. This is similar to how unit trusts work. When investors buy shares in a REIT, they are entitled to receive dividend payments, which are usually distributed either quarterly or semi-annually. These dividend payouts come from the rental income generated by the real estate that the REIT manages, as well as from property management charges and capital gains from business activities conducted at the real estate.

For example, Mid Valley was developed by IGB Corporation Berhad and is managed by IGB REIT on Bursa Malaysia. This means that investors can invest in Mid Valley and enjoy part of its rental and business income earnings without having to purchase the entire shopping mall. (iProperty)

Types of REITs

There are a number of REITs listed on the Bursa Malaysia stock exchange. Here are the broad categories of REITs investors can invest in and the typical properties they own:

• Commercial REITs – office buildings
• Retail REITs – shopping malls
• Industrial REITs – warehouses, logistics facilities and data centres
• Hospitality REITs – hotels and serviced residences
• Healthcare REITs – hospitals and nursing homes

How many REITs are listed on Bursa Malaysia?

There are a total of 19 REITs in Malaysia as of December 2022.

Source: Bursa Malaysia

Note: [S] refers to Shariah Compliant stocks

There are a number of REITs that follow Shariah or Islamic principles in their business dealings. According to Bursa Malaysia, out of the 19 REITs operating in Malaysia, five are Islamic or Shariah-compliant REITs (i-REITs). The five i-REITs are as follows:

1. Al-’Aqar Healthcare REIT (ALAQAR)
2. AXIS REIT (AXREIT)
3. AME REIT (AMEREIT)
4. Al-Salam REIT (ALSREIT)
5. KLCC REIT (KLCC)

The main difference between i-REITs and conventional REITs is the source of income. i-REITs get their income from business activities that are compliant with Islamic law - which excludes business activities deemed unethical, such as dealings with alcohol, tobacco, gambling and non-halal food products. For i-REITs that do business in a mixture of Syariah-compliant and non-Shariah compliant activities, the returns from non-Shariah compliant activities must not exceed 20% of their overall incomes. (iProperty)

Why are REITs a good investment?

REITs offer investors several benefits that make them an ideal fit in any investment portfolio. These include affordability, liquidity, transparency, stable income stream, exposure to large-scale real estate and professional management.

i) Affordability

Investing in REITs is a cost-effective way to gain exposure to the real estate market. REITs allow investors to purchase a stake in a large portfolio of properties without having to commit a large sum of capital. The cost of investing in REITs is just a fraction of the cost of regular property investment.

For example, let’s take a look at AXIS REITs — a publicly listed REIT in Malaysia. As of the date of this writing, its unit price is MYR 1.80.

When investing in REITs in Malaysia, the initial investment amount is RM1,000. The minimum share purchase required by Bursa Malaysia is one lot, which equals 100 units. However, it's usually best to invest a larger sum of money in a single transaction, since you'll have to pay several fees (e.g. broker fees, clearing fees, Sales and Service Tax, stamp duty) for each individual transaction.

The example below shows the total cost of buying 1 lot of shares.

See? Even with a small amount of capital, investors can start their own property investment portfolio!

Furthermore, small investors can also invest in AXIS REIT through regular savings plans. They can commit a certain amount of money every month, and this money will be used to purchase units of AXIS REIT on their behalf. For example, if a small investor commits MYR1000 every month, they will be able to purchase 555 units of AXIS REIT every month (excluding the transaction costs). This provides small investors with an affordable and convenient way to slowly build up their exposure to the REIT.

ii) High Liquidity

REITs are a great investment because it is listed on Bursa Malaysia and has high liquidity. This means that investors can buy and sell them at any time without having to wait for the real estate market to adjust. And, unlike with physical real estate such as houses, REIT shares can be converted to cash in less than a day. Just click ‘sell’ on an online trading platform, and the money will be credited into the investor’s account based on the number of REIT units sold. This means that investors can take advantage of market opportunities quickly and easily, without having to worry about being stuck with an illiquid asset.

iii) High Transparency

REITs are a great investment option for those who prefer a more transparent and regulated investment. In Malaysia, REITs are required to disclose their financial results and other relevant information on a quarterly basis, providing investors with regular insight into the performance of their investments. Additionally, the Securities Commission requires all REITs to disclose important information to investors, helping to ensure that they are making informed decisions. The level of transparency and regulation in the Malaysian REIT market helps protect investors from being taken advantage of by management teams.

iv) Stable income stream

REITs offer investors a steady stream of income through rental income, dividend payments, and capital gains. By distributing at least 90% of their taxable income to investors or unitholders, REITs provide a reliable source of income. In addition, REITs are generally less volatile than other investments since they are backed by real estate—a more stable asset than stocks and other investments. Property rentals are the main source of dividend yields for REITs, so as long as there are tenants, dividend rates will remain stable. This helps to protect investors from drastic market swings and provides a more predictable stream of income.

v) Professional management

REITs are managed by experienced and knowledgeable professionals who are familiar with the local real estate market. These professionals make investment decisions based on market trends, rental rates, and other factors that could influence returns. As a result, REIT investors can have peace of mind knowing that their investments are in good hands. In addition, professional management also provides investors with access to a wide range of services, such as financial planning and asset management. These services can help to ensure that investments are optimally managed and perform well over time.

vi) Diversification

Diversification allows investors to spread risk across multiple investments, reducing the chance of loss from any single investment. REITs offer the advantage of diversification in two ways. Firstly, REITs are composed of a number of different real estate investments, such as residential, commercial, and industrial properties, providing exposure to different property types and markets. Secondly, REITs provide exposure to different geographic markets, allowing investors to gain exposure to different economic cycles. By investing in REITs, investors can gain exposure to property markets all over the country, reducing risk and potentially enhancing returns.

What are the disadvantages of investing in REITs?

There are some drawbacks to investing in REITs, just as there are with stocks. These are the most significant disadvantages to bear in mind if you're considering investing in REITs.

1 | Lack of Control

Investors have no say over the day-to-day operations of the REIT and have no ability to influence the decisions made by the management team. Investors have limited ability to customize their investments by selecting individual real estate investments. The decisions of the REIT manager, including property acquisitions, dispositions, and tenant selection, are out of the hands of the investor. As a result, investors are at the mercy of the REIT's management team. This lack of control may lead to an unfavourable outcome if the REIT's management team is not making good decisions.

2 | High Fees

High fees are associated with investing in REITs because they can quickly erode returns. REITs typically charge a management fees, transaction fees, and performance fees, which can add up over time. These fees can be especially costly for short-term investors, as they reduce the amount of money an investor has to invest. Not only that, REITs are subject to market risk and are not guaranteed to deliver positive returns.

3 | Volatility

REITs are subject to market fluctuations, just like other investments, due to changes in economic conditions, interest rates, and other factors. Because of this, investors can face significant losses in their investments when the market fluctuates. Moreover, REITs are often subject to large swings in their share prices, which can make it difficult for investors to determine the true value of the investment and make decisions about when to buy or sell.

4 | Tax Implications

REITs are generally required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. As a result, investors in REITs may be subject to high levels of income taxes on their dividends. Furthermore, if the REITs pay taxes on their income and then pass on the tax burden to their shareholders, investors may be subject to double taxation. Additionally, when shares are sold for a profit, capital gains taxes may be due.

REITs vs. Real Estate: Which is the Better Choice?

Source: PropertyGuru and Dividend Magic

It's tough to say which is better, it all depends on your goals and objectives.

Are you looking for a more personalized experience? If so, real estate might be the way to go. As a property owner, you could earn rental income and see the appreciation of your investment. You would have the opportunity to manage the property and watch your investment grow over time. You would also have complete creative control, as well as access to certain tax benefits. However, keep in mind that there are costs associated with owning a property, both upfront and ongoing. If you're not comfortable managing the property yourself, you may need to hire a professional property manager.

On the other hand, if you're looking for a simpler investment, REITs may be a better choice for you. You can purchase shares with your initial investment quickly and easily, and you won't have to worry about vacancy, tenants, repairs or management—the REIT will take care of all that for you. Plus, you'll get passive income from dividends. And, with a REIT, you can diversify your real estate portfolio.

The Bottom Line

Real estate and real estate investment trusts (REITs) offer investors different ways to invest in the real estate market. Real estate can be more expensive upfront, but it offers investors more control and flexibility. REITs are a much more passive investment than real estate, but they can still provide regular cash flow. Whichever way you choose, real estate is a great way to increase your net worth, diversify your investments, and hedge against inflation.

REITs can be a good entry point for beginner investors who want to get into the real estate market, but it's important to do your own research to find quality REITs to invest in. Keep in mind that with any investment, there's always some risk involved. But if you're thoughtful about it and do your due diligence, investing in REITs can be a great way to get started in real estate.

See also: The Ultimate Guide to Real Estate: Everything You Need to Know

References

• Bursa Malaysia. Real Estate Investment Trusts (REITs)
• iProperty. 2020. How to invest in REITs in Malaysia and why is it an alternative to property investment?
• iProperty. 2022. Which REIT to invest in on Bursa Malaysia?
• iMoney. 2020. Are REITs Or Property Investment Worth Considering?
• Matthew DiLallo. 2022. Are REITs a Good Investment?
• PropertyGuru. 2021. Real Estate Or REITs: Which Is More Beneficial For Investment Purposes?
• PropertyGuru. 2021. REITs In Malaysia: 8 Core Categories Of Real Estate To Invest In
• Sampa K.June. 2022. REIT: 13 Advantages and Disadvantages for Investors
• Stephanie Colestock. 2021. REIT vs. Real Estate: Which Is Better?

Author

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This article is written by Lim Wuan Chin, Research Analyst Intern

Lim Wuan Chin is currently majoring in Finance and Investment at Tunku Abdul Rahman University of Management and Technology (TAR UMT). Wuan Chin joined TED Optimus Sdn Bhd for 3 months as a research analyst intern. She has participated in Bursa Malaysia Derivatives Virtual Trading Challenge 2021. She is an in-house author from TED Optimus.