5 Reasons Why You Should Invest In REITs Now
You may heard about REITs but “Do You Know How You Can Actually Invest Into REITs?” If you are interested in investing into REITs, you are looking at the right article to know everything about REITs. REITs are known to enjoy tax-free status in Malaysia and all around the world and there are many benefits by investing in REITs.
What is REITs?
Real Estate Investment Trust (REIT) is a fund or a trust that owns and manages income-producing commercial real estate (shopping complexes, hospitals, plantations, hotels, industrial properties and office blocks) according to Bursa Malaysia. In short, REITs gather or pool funds from group of investors to have enough capital to acquire and manage the different real estate assets. In return, REITs’ fund manager manages and enhances the value of the real estate portfolio to distribute the income to the investors in the form of dividends.
A management company for a REIT is permitted to deduct distribution paid to its shareholders from its corporate taxable income. However, to enjoy this tax-free status, the REIT must have most of its assets and income tied to the real estate and distribute at least 90% of its total income to investors/unit holders annually.
Before REITs is introduced to the capital market, most investors may invest in property development stocks and/or physical (landed) property to get exposure in the real estate sector. Now with the introduction of REIT, investors now have an option to invest in quality large-scale commercial real estate without having to buy the properties directly. Similar like a stock, REITs are listed on Bursa Malaysia, you are required to have a stock trading account with a broker to buy or sell the REITs during trading hours.
In Malaysia, there are many REITs listed and they are basically all around us, for example IGB Reit (Mid Valley Mall) and Sunway REIT (Sunway Pyramid Mall and Sunway Hotels).
There are many different types of REITs listed on Bursa Malaysia, and the diagram below gives a rough idea on the types of REITs listed.
The Biggest Question: Why Invest in REITs?
1. Low Interest Rate Environment + Covid Pandemic
Just 2020 alone, Bank Negara Malaysia has reduced the Overnight Policy Rate (OPR) by 1.00 percent from 2.75 percent to 1.75 percent; creating a low interest environment for the capital market. In general, a low interest rate environment would benefit REITs as it indirectly reduces the cost of financing for REITs; resulting in better earnings/dividends to the owners. If without Covid pandemic, a lower interest rates would also create savings for the consumers as they also has a lower financing cost; resulting in higher consumer spending and better occupancy rate for most commercial property.
With Covid pandemic still staying active, Malaysia has recently announced MCO 2.0 on several badly affected states and the King has also declared State of Emergency to fight the virus. This has created panic sell on most REIT counters as most investors worried that the 2 weeks MCO will further hurt the REIT industry in terms of occupancy rates and earnings. In January 2021, the Bursa Malaysia REIT Index has fallen to low of about 800 points from a high of about 1,000 points since early 2019. Covid Vaccine are developed and expects to reach Malaysia around April 2021, this is likely improve the current worsening pandemic situation in Malaysia in the future. If we look at the long term in which everyone are back to normal, the reward to risk ratio for some REIT counters are considerably attractive as it has reached almost multiple year low in January 2021.
2. Attractive & Consistent Returns
One of most interesting fact about Malaysia REIT is that it will not be subject to corporate income tax if it distributes at least 90% of its taxable income. Hence, most of the Malaysia REIT will take advantage of this special tax treatment and distributes at least 90% of its taxable income as dividend to the investors, leading to a better and consistent after-tax dividend income for the shareholders. Besides that, REITs are also exempted from stamp duties and real properties gain tax (RPGT) when they purchase or dispose the assets in their portfolio.
Adding up the 2 factors above, there are a lot of potential growth to expect by investing in REITs as they are able to enjoy the tax savings, as well as acquire and manage property assets on large economies of scale. Based on historical data, REITs also pay a higher than average dividend ranging from 3% to 10% to the investors. During economy crisis, REITs are also considered a defensive stocks to look into considering their stable dividend distribution and nature.
3. Exposure to Property Investment with Diversity
Most of time, we are constrained by the amount of capital and monthly commitment to purchase a property, limiting our capability to expose to the property sector. In addition to that, most likely you have to spend a lot of your time to research to purchase and manage the property (such as renovation, rental fee collection and tenant management).
With the convenience of REITs, you can be part of owners for top notch commercial properties such as shopping malls and hotels in Malaysia. With so many REITs available, you have all the freedom to build a diversified property investment portfolio by investing your funds into different types of REITs.
4. Ample Liquidity & Flexibility
Imagine that you have purchased a property and you need to dispose this property to get some quick cash, you have to go through a lot of hassle to find a buyer to sell the property and sometimes you may not be able to sell it at your preferred price due to emergency. It could take weeks or even months just go through the hassle to involve several parties to dispose the property. Due to Covid Pandemic, many people has also lost their jobs and income and some of them are forced to sell their property as they are unable to service their mortgage instalment.
By investing in REITs, you are able to buy and sell REIT stock easily in just a few clicks within the trading hours. This allows you to have a lot of liquidity and flexibility when you need cash fast during emergency or unexpected scenario.
5. Low Barrier of Entry
Traditionally, you would need to save a minimum amount of capital to purchase your first property as it involves a lot of different types of costs such as down payment, booking fee, stamp duties and etc; all of these costs will add to a big sum of money, creating a roadblock to your entry to the property market.
However, you can build a diversified property portfolio easily with an initial investment amount as low as RM1,000 by investing in REITs listed in Bursa Malaysia. Aside from that, listed REITs are required to product quarter report and annual reports which you can research the management and earning of the company before you start to invest in them.
Final Note
There are so many benefits in investing REITs, you may be wondering which REIT is the best to invest now.
Don’t worry! I will be sharing on 3 main Malaysia REITs that I personally like and perhaps is undervalued in the next article. Hope you are excited to read about it!
