REITs
How are REITs structured and why is it important for the investors to know? According to MoneySense, when a company decided to launch a real estate investment trust, money is raised from the unit holders during the IPO offering phase. The company would use the proceeds to buy a pool of real estate assets.
Sometimes, the REIT might even finance the purchase of assets through debts. The assets are held by an independent trustee who is responsible for safeguarding the interests of the unit holders and ensuring that the vehicle complies with the applicable laws in Singapore. Investors have to pay trustee fees.
On top of appointing an independent trustee, a REIT itself must be managed by a property manager for a fee. The management fees will be deducted from the income yield before distributions are made. As if the structure is not confusing enough, sometimes a sponsor or major shareholder might be present. This happens when the developer for the REIT choose to retain a certain amount of shares stake in the REIT itself, so as to receive income dividends.
The complicated structure means that investors need to understand the risks and rationalize whether the investment strategies are aligned to their risk profiles. This is because different REITs can have different structures, political and regulatory risks. Do not assume that REITs are low risk and that the dividend income is recurring. Always make it a point to read the prospectus and research reports to understand the business structure, dividend policy and management fees.
In 2009, the risk of bankruptcy in Singapore REITs became very high due to falling asset values caused by lower forecast on occupancies and rentals. This led to banks shunning away from giving loans to REITs and as a result, the Monetary Authority of Singapore had to intervene to prevent the situation from worsening. Therefore investors need to be aware of the leverage and refinancing risks that REITs carry. Investors need to understand that in the event of insolvency, the assets of the REIT would be used to pay off the debtors first. So investors should check whether the REIT is able to build up cash reserves after distributing the income to unit holders.
In conclusion, investors should make the effort to understand the product before deciding whether to invest in a REIT. Do not assume REITs are low risk investment products just because they distribute incomes. Understand the business, structure, fees, leverage and regulatory risks before parting away your hard-earned money.
Magically yours,
SG Wealth Builder
Well said.
How many of us are fully aware of leverage gains and double edged sword of using leverage?
In good times, nobody care!
Good piece. Thanks for sharing. I recall during the Financial Crisis, several REITs got into serious trouble and were bailed out by their parent sponsor or had to raise Rights Issues from shareholders. Instead of receiving the distribution yield as income, now have to pay some more. Still, I view REITs as a reasonably more diversified alternative to personally owning properties for rental income.
Nice piece of coverage on REIT! Thanks for sharing…
So credit rating and current gearing of a REIT is more important than the DPU yield. And the market usually priced it accordingly. 8% to 10% yield given by the Market for a particular REIT, there must be a reason for it. And the market is usually right. There is no “free-lunch” really!
Agreed that REITs are good way of diversifying our portfolio but for me, I would limit to only two REITs in my investment portfolio. Beyond that, there might be concentration risks.
It is only during financial crises that the real champions stood out!
Regards,
SG Wealth Builder
It’s a double edged sword.
Investors need to see the “yield” from the inside and not outside.