More often than not, we tend to be paralysed by the fear of loss than motivated by the opportunity of gain. Most people are brought up in families where their parents are risk-averse. As a result, fixed deposit is the only safe haven to invest in.
Then there is another group at the end of the spectrum who views stock market as the devil’s playground because someone in the family had lost a substantial amount of his life savings by trading stocks.
Not many of us are actually taught to invest responsibly. As cliché as this may sound, you are certainly aware that the three percentage you get from putting your money in fixed deposit is a surefire way for the inevitable: letting inflation gobble it up. Your money is not growing at all; at best, it is on par with the inflation rate.
This is where i personally think Real Estate Investment Trust (REIT) is your best ally (besides time itself) when it comes to a balance of risk-return for long term value investing. This class of asset is perhaps the underdog that most people would have overlooked.
REIT combines some of the best characteristics of stocks: unit trust and real estate property. For the uninitiated. REIT structure is somewhat similar to unit trust scheme as it pools investors’ funds to invest in approved assets, which are in this case, real estate properties.
However, unlike unit trust, no front-end load is involved. You do not even need an intermediary (agent) to start investing in REIT. All you need is a Central Depository System account and a trading account with a stockbroker for buy-sell transactions.
Unlike companies listed on the stock exchange, the operations of REIT are governed by a trust deed. This trust deed specifies how the management company manages and administers the REIT in accordance with the REIT objective. On top of that. a registered trustee is tasked as a custodian to protect our interest as unit
As a business entity, REIT is regulated by Securities Commission Malaysia in terms of how much it could borrow to invest. This is to prevent the scenario where business is over-leveraged to the extent it is unable to repay its debt obligations when unforeseen circumstances occur.
For the man in the street, who is not financially able to invest in commercial properties by owning shops and buildings directly, investing in selected REITs is the next best thing.
Well, there are always two sides to a coin but for REIT, the one thing investors do not have to worry about is tenant management.
Another good thing is that you do not need to start big when it comes to investing in REIT. Crush the myth that you need to start big although that helps. The more crucial thing is to start early. Get your feet wet in by investing in REIT, even if you currently have zero investing experience.
I say this because property investment could be too capital intensive and illiquid for the newbie investor while other investment vehicles might overwhelm you with all the details if you are just starting out.
Even for company stocks. there are so many to pick from so where do you start? If you start with REIT. you just have 14 REIT counters to shortlist and fewer financial statements to read. It is more manageable.
As for investment returns, REIT is known for its dividend yielding nature. REIT is almost certain to distribute at least 90% of its taxable income into the hands of investors to avert taxation at corporate level.
Compared to other companies, there is no obligation for them to distribute dividends to unit holders at regular intervals although they are earning huge prom.
It is ironic on how people always want stock prices to go up but they fail to accept the fact that volatility is a two-edged sword. If the likelihood is high for the price of a particular stock to rise much in a short time span, the likelihood of it to drop in a heartbeat is similarly high as well.
Just like the realities of life, we have to embrace the ups and the downs. You cannot have one without the other. However, here is the price trend on Malaysia REIT where the volatility of REIT stocks is usually relatively low.
I would even go further to say that the total investment return you are going to get is somewhat predictable to a certain extent. This is largely due to its regular dividend payout from 90% of a REIT taxable income and not too much from its short term price appreciation.
This is not necessarily a bad thing if you look at the example in the next section. Below is the dividend distribution history for Axis REIT since its inception which has been extracted from its 2011 annual report. We know that the stock market bottomed out in 20082009 but the return in the form of dividends to investors is still consistent. Just by looking at this chart alone, you would not even realise that there was a recession within this time frame.
In fact, the dividends payout has been on an uptrend since 2005. This speaks volumes about the resiliency of a good REIT even during the economic downturn.
Therefore, REIT is the perfect investment vehicle for investors who find trouble sleeping at night when there is too much price wiggles in the stock market.
If you are a newbie in the stock market but looking for hands on investing, there is no better way to start than testing the water with REIT stocks. There is no shame in admitting you are a newbie investor as nobody knows everything.
Sure, you could start with unit trust, but if you are a do-it-yourself person like me, half the fun is gone. There is another fun factor when you invest in REIT. You can actually inspect and pay a visit to some of the REIT assets. For example. whenever we go shopping at Gurney Plaza Penang, I always tell my wife I have a stake in it.
I am actually delighted to see that the asset enhancement initiative conducted by the management to increase the mall’s net leasable area and to attract more shoppers. This only means I would be getting more dividends from its distributable rental income!
The thing is REIT is not only for newbie investors. Even some very established, award-winning funds hold a portion of REIT stocks in their portfolio.
Yet another plus point is that the REIT industry in Malaysia has strong backing from the government. The withholding tax for REIT dividend only stands at 10% to retail investors like you and me.
Before 2008, it was tagged at 15%. On December 2011 the government announced that this incentive will be extended to another live years until 31 December 2016 Lower withholding tax would directly make Malaysia’s REIT more regionally competitive in terms of after tax yield.
Let me ask you, even in economic downturn, do you ask for reduction in rent from your landlord? No, correct? Now imagine a REIT owns assets at prime commercial areas and these assets operate in industry that is not impacted by recession such as retail malls or warehouses.
If a REIT holds these assets in its portfolio, it does not take an investment banker to know that this is long term value investing, Moreover, rental rate for any real estate is only unidirectional and that is always UP
According to Sunway REIT Manager Chief executive officer Datuk Jeffrey Ng at the REIT Conference in July 2012. market capitalisation for REIT in Malaysia is expected to grow by 30% to RM20 billion this year.
Main contribution to this would come from the impending listing of IGB REIT in September, which is worth between RM3.5 billion and RM4.5 billion. IGB REIT will consist 01 the renowned Mid-Valley Megamall and The Gardens Mall.
For many, this is old news but lGB Corporahon Bhd has another thing up its sleeve, that is, to spin of! two more REITs in the next me years. That means it would ultimately like to have a hospitality REIT and an office REIT although the exact timeline for this to happen is undetermined.
Also, it tums out that the emergence of another retail REIT is imminent KLCC Property Holdings Bhd is reported to be exploring the setting up of a REIT or equivalent It is just a matter of time before it becomes reality.
These are all retail properties, which are very defensive in nature. Even in uncertain economic conditions you still need to do your grocery shopping and perhaps retail therapy or window shopping.
Do you think these mega malls at such prime locations will close shop anytime soon? I definitely do not think so, l really do not want to miss the boat here so I am allocating cash for these Impending initial public offerings.
There is no better time than now to explore the benefits of REIT in Malaysia.
– CF Lieu