Real Estate Investment Trust (REIT)
Real estate investment trust typically in the form of a trust fund which pools money from investors and uses the pooled capital to buy, manage and sell real estate assets, such as residential or commercial buildings, retail or industrial lots, or other real estate-related assets. It is a passive investment vehicle which acquires and holds income generating real estates. REITs are driven entirely by recurrent rental income from real estates and with the present tax structure governing REITs, distribute at least 90% of its income to unit holders, thus providing stable and consistent income to unit holders.
Why should you invest in REITs?
- Stable and recurrent income
REITs are driven entirely by recurrent rental income from real estates. It distributes at least 90% of its income to unit holders, thus providing stable and consistent income to unitholders.
- Diversification
REITs invest in a variety of real estates at different geographic locations. This diversification strategy reduces the negative effects associated with holding assets in a single location.
- Professional management
Professional managers manage REITs and they have the expertise beyond the knowledge of individual investors.
- Liquidity
Unlike traditional private real estate ownership, REITs are liquid assets that can be sold fairly quickly to raise cash or take advantage of other investment opportunities. One of the reasons for the liquid nature of REITs is that its units are primarily listed and traded on a stock exchange.
- Affordability
Unlike direct property investments, where investors would require a large capital to invest, REITs provide average investors with the ability to invest and diversify their real estate investments without a large capital.
- Convenience
Sale and purchase agreements, lawyers’ fees and stamp duties are among the many things real estate investors have to put up with. Through REITs, investors are relieved of such factors.
- Comfort of regulations
REITs must comply with the requirements of the Securities Commission Act 1993 , the Guidelines on Real Estate Investment Trusts and the Guidelines on Islamic Real Estate Investment Trusts , which has investor protection as its main objective.
What are the risks?
- Distribution is subject to cash availability
If the real estates of the REITs do not generate sufficient net operating profit and cash flow, the REITs ability to make distributions will be adversely affected.
- Returns are not guaranteed
The dividend payments from investing in REITs are not guaranteed and the total return of REITs, amongst others , is subject to the performance of the property market. Hence, the unit price of a REIT may go down if its underlying properties drop in value.
- Loss of control over investment
Investors will not have direct control over the management company’s investment decisions like when to buy or sell certain real estates, or how they will be managed.
- Market factors
Like other investment products, REITs are subject to the vagaries of market demand and supply. As such, market fluctuations, confidence in the economy and changes in the interest rates may affect REITs price.There are other risks associated with investments in REITs. Please read and understand these risks that are extensively highlighted in the REIT’s prospectus.
Source: www.min.com.my
