REITs stands for the term Real Estate Investment Trusts. A REIT is a trust fund that holds or invests in properties, some of which can be rental properties. Its major incomes are rental returns and it is obligated to distribute most of its profit as dividend to its holders. REITs can be very stimulating tools for the purpose of accumulating income making assets.

Still, there are some firm conditions regarding REITs.  In the beginning of this year, the Securities Commission released guiding principle on REIT.  These are better rules for property trust funds.  The market was and is even now quite thrilled about the modifications. The first REIT, Axis-REIT, was listed on Bursa Malaysia with the title KLSE, in August 2005.

“What are REITs?”:

According to Investopedia, a “REIT has two unique features: its primary business is managing groups of income-producing properties and it must distribute most of its profits as dividends.”

Unlike a unit trust, which is sold through agents or banks, REITs are traded on stock exchanges.  So it gives investors returns through capital appreciation from price changes and dividends, just like any listed company’s stock.

Why do we like REITs?  What are the benefits of REITs?

REITs hold rental properties, so its main incomes are rental incomes.  Such rental properties can be office buildings, shopping malls, land, etc. Usually, REITs will pay out at least 90% of its taxable profit as dividends. This is either required by regulations or due to tax incentives.

Rental property is usually a fairly consistent source of income. Often with at least a 90% profit payout, the income stream invested in REIT is fairly consistent for investor. This makes REITs high-yield stocks and extremely attractive as income-generating assets or assets.

As investors, we just need to invest a small amount to own part of the shopping mall, offices, lands, etc. through REITs. We can sell it anytime and easily through stock markets. The transaction cost to buy and sell REITs is low as compared to normal properties. We can own a diversified portfolio of properties. The usual property investments cannot provide these benefits.

Yes, stock prices of REITs fluctuate. However, as long as the rental properties are properly managed, the rental markets are stable and the rental incomes are consistent, you can get consistent dividend incomes. And if you bought the REIT at a good price, it gives you consistent good ROI, regardless of fluctuations of stock prices.

Why do companies with such good rental properties want to put their rental properties into REITs?

Because they can unlock their rental properties value. This means they can sell, for example, 30% of the ownership of the property to the public, foregoing future rental income, in exchange for instant upfront cash pile and still be in control of the properties.

What are the criteria of good REITs?

REITs must have good quality assets and good quality management.  You must buy it at a good price and the management should grow the rental properties and increase the rental income for you.

Good quality assets means well-managed rental properties at good locations, broad base tenants (without the fear of losing one or two big tenants), and therefore the rental incomes will grow or at least be maintained.  Good management will drive growth through acquisitions or the building of more rental properties to increase rental incomes.

REITs with rental properties like shopping malls are quite attractive. Office rental incomes are generally a bit more volatile and hotel business may be cyclical.  It can also be helpful to stick to REITs that control local properties that you may know or recognize. If the shopping malls deteriorate you will know when you shop. For investors without a good understanding of property markets, REITs with assets like shopping malls can be safe investments.

What makes the prices of REITs stocks fluctuate?

Beside normal fluctuations due to simple demand and supply, when the market expects the rental to go soft prices of REITs’ prices will fall. When the market expects rental to go up, REITs stock prices will go up. In a way, a good grasp of property market knowledge will be helpful in investing in REITs.