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Today, we study on REITS (Real Estate Investment Trusts). Some examples are CCT (Capital Commercial Trust), SuntecREIT, CapitalMall Trust, CDLHtrust, FrasersCT, MP REIT, FirstREIT, K-REIT, AscendasREIT etc. Refer to SGX to see the whole list.
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So what is REITS?
REITS are comapnies that own & actively manage income producing real estate properties. They provide ongoing dividend income along with potential for long term capital gains through share appreciation.
So what does shareholders get?
REITS are requied to distribute 90% of their income. REIT shareholders receive value in the form of both dividend income & share price appreciation but the bulk of it lies in its yield. A typical 7% yield may look attractive to shareholders. In Singapore, the av. returns should be around 5% yield. For example, SuntecREIT now at 10% div yield (as of 17 Oct 08) when market cap drops as investors sold down this REIT due to their negative outlook on re-financing issues, gearing and steady inflow of rental income admist the drying up of credits in the global financial markets.
Publicity traded REITS generally are vertically integrated & professionally managed corporations. They adhere to the same corporate governance principles that apply to all major companies.
Lets compare the advantages & risks of REITS
- Predictable revenue. Tenants often sign leases for long periods of time on interest payments from financing of these properties. But take note if tenants default on payment or when they ask for rebates, lowering down on their income rental where their bargaining power is high (such as current situation), then the revenue stream may be affected
- Earnings transparency. Easily understanable business model: When property occupancy rates & rents rise, more income level produced
- total return. historical track record, providing high level of current income + long term capital appreciation, inflation protection
- exposure to professionally managed real estate with small capital outlay (at least you can afford it and not buying directly into properties)
- low volatility in unit price
- performance of REITS monitored regularly by Independent Directors, Analysts, Auditors & media. The scrutiny provides investors a measure of protection
- enjoy tax exemption on distributed income. Normal properties when you buy have to pay stamp duities, taxes, legal fees etc...
Disadvantages & risks
- most funadmental risk: investors lose money when need to sell their REITS in times of decreasing unit prices. Tenant defaulting, not paying on times (accured payment or accounts payable rises), bargain/protest on rents (even when they sign the lease agreement) during downtimes etc.
- influenced by macroeconomic factors. when property market affected, depressed, property market --> decrease in rental income ---> tenants find it difficult to pay rent due to decreasing demand. for office rents, companies may not wish to expand as they cannot get loans (current credit crisis) from banks (if their cash at bank/net cash equivalent not sustaining to purchase new office grounds). Thus, demand drop, supply rises, office rental drops
- investors should examine where the properties of REITS are located. High concentration of developement in 1 community or geographic region may leave it vulnerable to a downturn in that area's economy
- bad management ---> great risk as strength of reit depends on the integrity and shrewdness of the REIT Managers
- when REITS purchase new properties or make new acquisitions ---> issue new units to finance purchases. More unts may lead to dilutive effect of lower yield for the shareholders
Some factors affecting REITS
- Population growth, type of population, consumer demographics & segmentation & size
- Foriegn direct investment
- Interest rates
- depreciation of the land building (e.g. office/industrial buildings)
- quality of tenants
- leaseback agreement
- rental income
- unemployment rate & other economic factors
- government intervention
- NAV (net asset value can be use to value REITS to its discount value to its share price - intrinsic value)
Some examples on the types of REITS
- Healthcare (e.g. Parkwaylife REIT)
The DPU (Distribution per unit) to measure and gauge the performance of REITS. The REIT structure include the:
Asset Manager: He decides what properties to acquire & include in portfolio
Property Manager: He manages all the properties that are under the ownership of REITS (e.g. the no. of leases, kind of tenants, rental space, rental price etc.)
---> Understanding the REITS structure may be useful as you as a unitholder must know who the property manager, asset manager is. Not to forget the trustee also.
*Please take prudent measures & due diligence when you wish to buy REITS.