For most people, investing in real estate is a dream, especially with ‘affordable’ homes priced at over RM400,000 today. Many Malaysians cannot afford to buy their own house, let alone to invest.
What is the right alternative for a handful of people who don’t have the cash to invest in real estate? The answer is Real Estate Investment Trusts (REITs).
In this article, the author will explain what a REIT is and what are the advantages of investing in a REIT.
A REIT is a fund or trust that owns and manages income -generating commercial properties. Among the types of properties involved are shopping complexes, hospitals, plantations, hotel industrial properties and office blocks.
A management company for a REIT is allowed to deduct distributions paid to its shareholders from taxable corporate income.
However, to enjoy such tax-free status, a REIT must have most of its assets and income tied to real estate as well as distribute at least 90% of total income to investors or unitholders on an annual basis.
Just like trading in stocks, you need to have a Central Depository System (CDS) account and a trading account managed with a broker. You also have to pay brokerage commissions, stamp duty, clearing fees and goods and services tax (GST).
If you are looking for an Islamic or Shariah compliant REIT in the country, there is no need to worry. According to Bursa Malaysia, of the 18 REITs in the country, four are Shariah-compliant REITs (i-REITs).
The four i-REITs are Al-’Aqar Healthcare Reit (ALAQAR); Al-Salam REIT (ALSREIT); AXIS REIT (AXREIT) and KLCC Property Holding (KLCC).
The difference between an i-REIT and a conventional REIT is the source of income. i-REIT earns income from Shariah-compliant business activities. For i-REITs conducting Shariah-compliant and non-Shariah-compliant business activities, the return from Shariah-non-compliant business activities must not exceed 20% of its total income.
There are several benefits if you choose to invest in a REIT, namely:
i) You don’t have to fret to issue large capital to invest in a REIT. The cost of investing in a REIT is only a fraction of the cost of direct investment in real estate. You can start with a capital as low as RM100. The minimum share purchase set by Bursa Malaysia is one lot which is equivalent to 100 units.
ii) REITs are more liquid than physical real estate. Publicly traded REIT shares are readily converted to cash when traded on the stock exchange.
iii) REITs also tend to pay a fixed dividend, which is derived from existing rents paid by tenants living in REIT properties.
iv) REIT properties are managed by professionals who will add value for higher yields, thus benefiting investors in the long run.
However, each investment must have its own risks. The total return from the REIT is subject to the performance of the real estate market. Therefore, the unit price for a REIT can go down if the underlying property goes down in terms of its value.
In addition, investors have no direct control over the investment decisions of the management company such as when to buy or sell certain properties and how the properties will be managed.
REITs are also subject to market demand and supply. Therefore, market fluctuations, confidence in the economy and changes in interest rates may affect the price of a REIT.
If you want to choose a good REIT, several factors need to be considered such as the type of property; location; growth potential; sponsor; financial structure; management and governance team.
The return to the unitholders of the REIT is in the form of income distributions based on the distribution policy set out in the REIT agreement and the capital gains that may arise from the increase in the price of the REIT.
