Tom is a sales engineer. He has been working since graduating from a local university three years ago. From which, Tom is able to save up a sizeable sum of RM 30,000 as he is careful in spending.
However, just like many who are in their late-20s residing in the Klang Valley, Tom remains doubtful of achieving his dream of owning a property before turning thirty. Property prices seem to rise faster than his ability to save money.
Out of Reach
Today, it is common for a tiny unit of condominium to be priced at RM 500,000 in the Klang Valley. If Tom is interested, he needs to prepare at least RM 70,000 for the down payment, stamp duties and legal fees for the property purchase. The amount would be higher if Tom intends to renovate and furnish his property.
Plan B: Invest in REITs
Needless to say, Tom could not afford to buy a RM 500,000 condominium. Presently, if you are reading this and your situation happens to resemble Tom’s, I have good news for you. There is another viable option for us to invest in properties.
The option is known as Real Estate Investment Trusts (REITs). The concept is simple and here’s how it works:
- Investors (like us) place money into a REIT in exchange of its units. Thus, we become unitholders (or shareholders) of a REIT.
- The REIT would use investors’ money to buy investment properties. They include shopping malls, office buildings, industrial buildings, hotels and even hospital buildings.
- From which, the REIT would derive rental income from them. Upon deducting expenses, the net income received by the REIT would then be distributed to unitholders (like us).
Affordable & Convenient
Today, we can buy and sell units of REITs conveniently like shares as REITs are listed on stock exchanges. This includes Bursa Malaysia. The minimum amount of units to be bought and sold is set at 100 units per transaction. Thus, unlike physical properties, we can invest and participate in future profits generated from commercial properties which are worth billions with as little as a few hundred Ringgit.
Before investing, it is important for us to understand that REITs are structured to be long-term investments. They are not primarily designed for short-term trading gains. In this article, I would share 5 reasons why we should consider REITs as long-term investments. They are:
#1: REITs pay out Regular Distributions
All REITs listed on Bursa Malaysia pay at least 90% of its realized income to its unitholders. They are known as income distributions. Most would declare and pay out income distributions on a quarterly basis. Just a handful of REITs choose to distribute income on a half-yearly or on an annual basis. Since its introduction, most REITs have been producing steady stream of passive income to its unitholders.
#2: Diversified Pool of Tenants
REITs which own a portfolio of properties would derive income from a diversified pool of tenants. Let us take shopping malls as an example. A shopping mall derives income from leasing out retail spaces to hundreds of tenants such as Starbucks, McDonalds, H&M, Uniqlo, and so on and so forth.
If one of the many tenants decides to end its lease, the shopping mall would continue to derive income from its remaining tenants. There provides income stability to the shopping mall. In a way, it is a distinctive advantage over owning and renting out a condominium unit to a tenant. After all, the owner would receive no further income once the tenant decides to move out from his condominium.
#3: Benefiting from Long-Term Leases
There are REITs which own properties where the lease agreement structured is long-term. The period can be as long as 10 – 15 years. This means, if you own units of the respective REIT, you would receive regular income distributions from these properties for a very long time. Again, it adds income stability to the REIT which is also another advantage over renting out a condominium unit to a tenant for 1 – 2 years.
#4: Increase Income with Rent Reversions
Once a lease agreement expires, a REIT would try to renew the lease agreement with its existing tenant for the designated property. Often, these agreements are renewed at a higher rate as compared to its existing rate due to inflation and rise in property value. This would contribute to growing income distributions to unitholders who are holding onto the REIT over the long-term.
#5: Increase Income with New Property Acquisitions
This is a form of leverage for Tom who is unable to afford to buy a physical property due to his financial position. Investors who have weaker financial standing are able to leverage on a REIT’s financial position which is stronger to acquire new investment properties. This would also contribute to growth in income distributions to unitholders.
Which REITs should I buy?
Just hold your horses for a moment.
There are more to consider before investing in REITs. First of all, there are 17 REITs listed on Bursa Malaysia. You may want to ask yourself the following questions:
- How do I assess the financial results of a REIT?
- What’s my dividend yield for investing in REITs?
- Tax considerations for Investing in REITs
- When do I buy and sell REITs?
- How do I start building a complete REIT-based portfolio that generates steady passive income?
These questions are helpful to further enhance profits from investing in REITs while reducing unnecessary risks from investing in bad ones.
This article is sponsored by Securities Commission Malaysia, under its InvestSmart Initiative.
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