A Real Estate Investment Trust ('REIT') is a vehicle that raises capital to purchase a portfolio of real estate assets, usually with a view to generate income for unit holders. Units of listed REITs are bought and sold like any other securities listed on exchanges at market-driven prices.
The underlying assets of a REIT could include commercial, retail, industrial and residential properties located within a specific country or region. Most REITs are structured around large properties and typically own multi-property portfolios with diversified tenant pools. With REITs, individual investors can own stakes in such properties, thus reducing the risks of reliance on a single property and tenant.
A REIT typically distributes dividends to unit holders at regular intervals based on the income generated by properties in its portfolio. Most of the REITs’ revenues are derived from rental payments under contractually-binding lease agreements with a specific tenure. It is thus important for investors to study the occupancy rates of properties acquired by REITs.
REITs give investors the opportunity to buy into properties managed by professional property management companies. Most REITs have annual managers’ fees, property management fees, trustees’ fees and other expenses. The cost of such fees will be deducted from investors’ original cash yields before distributions are made.
Some benefits of investing in REITs include portfolio diversification, income distribution, participation in the property market and professional management.
Investors should study the specific REIT’s prospectus to understand its investment objective and details of the properties to be acquired before making an investment decision.
REITs can be traded in the same way as Singapore stocks, either through broker-assisted means or through our Maybank Trade Online or Maybank Trade Mobile trading platforms.
As with all financial market investments, investing in REITs involves a certain level of risk. Here are some risks to take note of before you start investing in REITs.
Market Risk
Investors are exposed to market risk or volatility of the specific underlying asset which constitutes the REITs. Macroeconomic conditions may directly or indirectly result in property price fluctuations, affecting investment outcomes.
Foreign Exchange Risk
When the constituents of REITs are priced in one currency (e.g. USD) and are different from the functional currency of the investor (e.g. SGD), investors are exposed to fluctuations in foreign exchange rates, which may increase or erode investment returns on the trust.
Interest Rate Risk
Refers to the risk that an investment's value will vary due to a change in the absolute level of interest rates, the spread between two rates, the shape of the yield curve or in any other interest rate relationship. The change of interest rate will also affect the income of REITs as interest expenses are one of their major costs.
Debt Financing risk
REITs typically use debt to finance their properties. Investors are exposed to higher risk when REITs are over-leveraged (high gearing level). In addition, the debt profiles of REITs also determine their sustainability under different interest rate environments.