Investing in REIT shares

What is REIT?
Real Estate Investment Trust (REIT) is a financial structure created to enable members of the public who are keen to invest in property to invest without the need to take a 'solo' risk. To try to 'gobble up' a good acquisition by themselves may prove too big and may cause indigestion.

Many investors do not have a huge appetite for risk and would be willing to pass up a good property deal even if it is on their lap. But they would probably say ‘yes’ to the investment if a few friends were to be willing to participate in it. Herein lies one of the fundamental reasons for the creation of REIT.

Often, many of the larger properties are occupied by big companies and multi-nationals with internationally established business. These companies, many of which are the Fortune 500 companies of the world, occupy huge volumes of space which would be beyond the ability of the ordinary man to own and be a landlord.

The commitment of these companies to their tenancy agreements are as good as bank guarantees. They generally do not default on their rental commitments – which is what any property investor would like to see. But again, because of the size of the real estate, only if there were to be a grouping of investors, would one have any chance of owning such a big asset.

Correspondingly, if you were to buy smaller assets, it is common that your tenants will be smaller firms and start-ups whose rating would not be Triple AAA and are more likely to default on their rent, not to mention, even their business!

When the grouping of investors is big enough, it makes economic sense to engage professional services to manage and enhance the value of the assets. This enables you to free up your time and yet put management of the real estate in the hands of capable professionals – whose job, among other responsibilities, is to further improve the yields and value of your real estate. This means ownership without having to lift a finger!

Life is a roller coaster of uncertainties. Even when we are most confident of the future, calamities and unfortunate events can occur and which may require us to use cash urgently.

REIT shares traded on the Bursa Malaysia allow you to sell the property shares immediately and obtain cash within three days. You only need to sell the amount of shares for which the cash you require unlike owning a building yourself where you cannot sell a part of the building. Therefore REIT shares accord you financial flexibility for your immediate needs.

The injection of quality assets such as Menara Axis into Axis-REIT has contributed to the trust's success

One of the differences between the REIT of today and that of yesteryear is in the area of taxation. Previously, property trusts did not enjoy any tax preference and were taxed like usual corporations at 28% income tax. Today, however, the REITs are enjoying a lower tax bracket of only 15%.

REITS in Malaysia are generally returning to shareholders dividend yield of between 6.5% and 7.5%*. In the short-term this is likely to be the scenario; however, in the long- term, a well-run REIT should be able to pay out dividends in excess of 10% per annum, due to, among other factors, rent increases as the market improves, as well as extraordinary gains due to capital gains on asset disposal.

The various REITs on Bursa Malaysia have their core investments in differing market segments of the property market. Axis-REIT is focused on industrials offering principally office and warehouse space used by trading companies such as Fuji Photo Film, Fuji Xerox, Minolta, Ricoh, Electrolux, Philips and DHL.

The YTL–REIT is focused predominantly on the retail trade as can be seen from its investment into Starhill as well as Lot 10 Shopping Complex.

The UOA and Tower REIT have their attention focused on office space. The latest listed-REIT, KPJ Healthcare REIT, is focused on investments in hospital buildings.

The decision on which segment a REIT wishes to focus their "energy" on, depends on the core competency of the promoters – i.e. the promoters believe in focusing on the areas of the market they know best. All these segments have their advantages and it is very much up to the investing public to decide which market they have more faith in.

The other major difference in today’s REIT is that they are mainly promoted by developers who own tenanted properties, rather than financial institutions as in the REITs of yesteryear.

I am sure almost everyone will agree that bankers under¬stand ‘finance’ best and are unlikely to be the best managers or promoters of real estate, which is best left to those in the specialised field of property development and investment.

Therefore, you have today the birth of developer-promoted REITs such as Axis, YTL, UOA and Tower REIT.

The management of REITs in Malaysia is under the strict purview of the Securities Commission (SC) which has imposed many rules and regulations pertaining to how the REIT is to be managed, including the prior approval of the SC for the appointment of any particular director of the management company. This ensures that the REIT is in capable hands.

The YTL–REIT is focused predominantly on the retail trade as can be seen from its investment into Starhill as well as Lot 10 Shopping Complex.

Besides this, shareholders and directors who are injecting any of their assets into the REIT do not have any voting rights when it comes to deciding on acquisitions.

Therefore it is the "minority" shareholders who to a certain extent decide on whether a proposed acquisition is good or not for the REIT.

The establishment of a strong and capable management team ensures that the REIT is well managed and that tenants’ issues are well addressed. By managing buildings and attending to matters pro-actively, REIT managers are able to differentiate themselves from the ‘one-off’ property owner who manages one or two buildings on an ‘ad-hoc’ trial-and-error basis.

Professional management ensures that tenants enjoy a superior and hassle-free work environment. This helps to ensure that tenants are long-term and generally do not mind paying a little bit more for quality service, to commensurate with the tenant’s image. It is this pro-activeness that ensures that occupancy is always kept high – rain or shine!

In summary, investment in REIT is all about investing in property with the following features:

1.Pooling resources to invest in quality buildings.

2.Pooling resources to invest in quality Fortune 500 tenants.

3.Economies of scale allow for professional management which know how best to enhance the value of the property.

4.Liquidity – as your shares can easily be disposed off overnight in times of urgency.

5.Your investment enjoys a lower tax bracket.

6.Yields paid to unit holders can potentially be higher than if you were to invest individually.

*Axis REIT, however, for the year ended 31.12.2006, paid an annual dividend of 10.36% p.a. to unit holders.

By By Stephen Tew, MIEA past president on Nov 27, 2007