Thursday, 5 June 2014

What is a REIT?

REITs in recent years have been garnering significant investor interest due to its stable income and high yield. With Asia’s affinity with property, REITs took off in a big way. At time of writing, the largest REIT markets in Asia are Japan, Hong Kong and Singapore.

REITs are professionally managed collective investment schemes where capital is pooled together from a large number of investors to invest in real estate. A REITs primary objective is to ensure that its portfolio of properties can generate income that can be distributed back to investors periodically (typically quarterly) as dividends.

A REIT can raise capital to invest in real estate typically by selling shares or through debt. Capital is raised initially through an IPO, subsequently more shares could be sold through rights issues. Debt could be structured in various ways including issuing bonds or borrowing from banks.

A REIT manager will typically be assigned to manage and growth the REIT to provide investors with increasing dividend payouts. This is typically done in 2 ways, via acquisition of new properties, or enhancing existing properties to increase income. An example of enhancement is by renovating or refurbishing existing properties in order to charge a high rental.

Some REITs may have sponsors. These sponsors are typically the property developer in the niche that the REIT operates in. The strong sponsor provides the REIT with easy access to acquire new properties. It also assures investors REIT has strong financial backing should it require additional funding.

REITs tend to have very specific portfolio focus. Typical REITs are classified into the following categories:-
  • Residential (eg Condominiums, Housing, Apartments)
  • Retail (eg Retail spaces, Shopping malls, Shops & Shop houses)
  • Offices (eg Office buildings)
  • Industrial (eg Factories, Warehouses, Industrial parks)
  • Healthcare (eg Hospitals, Nursing homes)
  • Hospitality (eg Hotels, Service Apartments)
Some REITs specialize in portfolios in one region or country, while others hold a portfolio of properties in multiple countries.

Don’t assume that REITs are low risk investments just because they provide a high yield. Just like any other forms on investing, we are investors have the responsibility to study the risk vs rewards before taking the plunge.

In time to come, I plan to share my analysis on specific REITs around Asia. Please check back in from time to time for more about REITs!

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