5 MUST-KNOW Terminologies Before You Invest in REITs

Real Estate Investment Trusts (REITs) are essentially companies that operate and/or manage real estates. REITs are especially well-received among long-term investors that are looking for a reliable passive income stream.

To invest in REITs is identical to typical stock investment – you buy their shares through your stock broker.

That said, here are 5 terminologies that you HAVE TO know before investing in REITs:

(1) Distribution/Distribution Per Unit (DPU)

Distribution is one of the MOST IMPORTANT elements in REIT investing. Essentially, distribution refers to the total amount of money that a REIT is paying back to its investors at the end of every quarter or Financial Year (FY).

As such, take the total distribution of a REIT and divide by the total number of shares of a REIT, and you will get the Distribution Per Unit – a.k.a. the total amount of distribution you will get as one unitholder of a share in the particular REIT.

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DPU details of SunREIT (Source: i3investor)

(2) Dividend Yield

Compared to Distribution/Distribution Per Unit, Dividend Yield is much more familiar to people.

In short, Dividend Yield is derived from Distribution Per Unit (DPU) – by dividing DPU with the price per unit of a REIT.

From the example above, the Dividend Yield of SunREIT for its latest four quarters is:

Dividend Yield of SunREIT

(3) Net Asset Value (NAV)/Net Asset Value Per Unit (NAVPU)

Net Asset Value shows the total worth of the net assets of a REIT.

When divided by the total shares (or units issued) of a REIT, you will get the value of Net Asset Value Per Unit (NAVPU), a.k.a. the total value of the net asset of a REIT per share.

NAVPU is very useful to determine if a REIT is undervalued or overvalued. As an example, if the price of a REIT is less than NAVPU, it shows that a REIT is currently market-priced at a value less than the worth of the net asset of the REIT (undervalued).

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YTL REIT market price: RM1.34 vs NAVPU (or NAPS) of RM1.6059. (Source: i3investor)

(4) Gearing

Gearing refers to the leverage of a REIT. Essentially, it refers to how much is the total debt of a REIT in relative to its total asset.

Generally, a REIT is legally required to maintain a Gearing of 50% or less.

Source: YTL REIT 4Q FY2019 Quarterly Report

(5) Occupancy Rate

Occupancy rate is extremely crucial to determine if a REIT is going to earn money. Simply put, the more tenants that occupy a REIT's property, the higher the occupancy rate of the property.

Generally, we should want to look for REITs that have a high occupancy rate for their real estate portfolio:

Mid Valley and The Gardens have more than 95% occupancy rate. (Source: IGB REIT FY2018 Annual Report)

No Money Lah’s Verdict:

So that’s it! Here are 5 terminologies that you MUST KNOW while investing in REITs. While this is a short and simple article, yet if you are new to REITs, I definitely hope that you find this article informative!

If you find this article useful, do share this article out to benefit more people around you! Also, do check out my articles on WHY you should invest in REITs, and the different TYPES of REITs in the market (and why they matter!)



6 Types of REITs and WHY THEY MATTER

Real Estate Investment Trusts (REITs), are essentially companies that own and/or operates income-generating real estates. As an example, Mid Valley and The Gardens are operated by IGB REIT, and from the profit earned (mainly through rental), REITs pay their investors in the form of dividends.

That said, in this article, I want to dive deeper into the types of REITs in the market, and why knowing this is important in your REIT investing decision.

Essentially, there are 6 kinds of REITs that you will find in the listed market (a.k.a. REITs that are purchasable in the Malaysian stock market):

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(1) Retail REIT (eg. KIP REIT, IGB REIT – Mid Valley, The Gardens)

Retail REITs, as the name suggest, are REITs that own and operates malls and shop lots.

In other words, Retail REITs’ revenue comes from renting the space of their properties to retail tenants (eg. Nike, G2000, llao llao and more).

Pros:

If a Retail REIT owns a mall that is located at a prime area, they’ll generally attract crowd which would translate to 3 things: (a) Low tenant turnover, (b) Ability to command higher rental, and (c) Relatively stable revenue stream.

Cons:

That said, the economic condition would generally impact the revenue growth of Retail REITs. Logically speaking, consumption will drop in a bad economic condition and it will impact Retail REITs’ revenue negatively.

IGB REIT owns and runs Mid Valley and The Gardens.

(2) Office REIT (eg. MQ REIT, UOA REIT)

Office REITs are REITs that mainly own and operates office buildings.

Some of the common tenants of Office REITs are mainly from the financial services sector and MNCs.

Pros:

Office REITs that have office buildings in prime areas are able to command higher rental, BUT…

Cons:

Excess supply of office buildings are leading to (a) Less sticky tenants and (b) Price wars among office spaces.

Also, Office REITs will also be impacted negatively by bad economic condition.

UOA REIT owns and runs office buildings.

(3) Hospitality REIT (eg. YTL REIT)

Hospitality REITs are NOT REITs that own and operate hospitals.

Instead, Hospitality REITs are REITs that manage hotels and residential buildings. As an example, YTL REIT owns the JW Marriott hotel (in Malaysia and Australia) and the iconic Majestic Hotel in KL.

Pros:

Hospitality REITs can benefit from the rise of the tourism sector of the country, as well as currency drop that would lead to our country being a more attractive tourist-friendly country.

Cons:

Highly impacted by global economic growth. A dull economic scenario would impact the tourism sector badly and in turn, lead to less revenue for the hospitality industry.

Majestic Hotel is owned by YTL REIT

(4) Industrial REIT (eg. Atrium REIT)

Industrial REITs are REITs that own and operate properties like warehouses and factory spaces.

Pros:

Industrial REITs have little need to spend property maintenance or fancy designs relative to other REITs, which translates to lower operating expenses.

Cons:

(a) Most heavily affected by economic downturns, as factory operations and inventory storage, would be cut to a minimum during a downturn. (b) Limited rental hike potential due to a similar business model.

Atrium REIT

(5) Healthcare REIT (eg. Al-Aqar REIT – KPJ Hospitals and Specialist Centres)

Healthcare REITs are REITs that own and operate hospitals and healthcare services properties.

Pros:

No matter the economic condition, Healthcare REITs would, generally, be an excellent defensive hedge as people will need healthcare services no matter the economic condition.

Cons:

Limited expansion opportunity within its own properties (eg. Long term lease agreement that reduces revenue upside), unless opting for acquisitions of new or existing healthcare properties.

Al-Aqar REIT is the only listed Healthcare REIT in Malaysia

(6) Mixed REIT (eg. SunREIT – Sunway Pyramid, Sunway Tower & Axis REIT)

Mixed REITs are generally, REITs that own and operates real estates of different nature.

As an example, SunREIT has a portfolio of properties ranging from retail malls, offices, hotels, healthcare, and warehouses.

Pros:

Highly diversified range of properties. More resilient to various market fluctuation and economic conditions.

Cons:

Exposed to all kind of risks brought by owning a different kind of REITs.

SunREIT has an impressive portfolio of diversified properties.

Which type of REITs should You Invest In?

Based on the type of REITs introduced above, which are the REITs that you should consider investing in?

Generally, while REITs are relatively stable compared to conventional stock investing, REITs do have different risk profiles depending on their nature:

As an example, if you were to invest in Healthcare REITs for their nature of being more stable during various economic conditions, you should (generally) expect a lower yield compared to other REITs as Healthcare REITs have a lower potential for revenue growth.

On the other hand, if you were to invest in Industrial REITs, you should (theoretically) expect a higher yield as a compensation for the relative risks involved while investing in Industrial REITs.

Risk vs Expected Yield among Different REITs

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That said, the actual yield of your REIT investments may or may not reflect the ideal scenario given existing market volatility and actual business performance of REITs – but since we are discussing purely on the nature of the respective REITs themselves, I think a necessary conceptual understanding is still value-adding to you.


No Money Lah’s Verdict

So that’s it – the 6 types of REITs that you will find in the market. I hope this article has been informative for you, and if you are new to REITs, give you a more in-depth understanding of REITs.

In short, not all REITs are made the same and different REITs should be studied at with a slightly different lens depending on their nature.

REIT, in my opinion, is definitely a great choice that you can seriously consider should you are looking for a solid passive income and long-term investment to fulfill your financial goals in life

In the coming articles, I will share with you the terminologies that you should know in REIT Investing and an overview of all listed REITs in Malaysia.

Stay tuned!



Introduction: REITs and Why Invest in Them?

As a kid, two of my most visited shopping malls are Mid Valley and Sunway Pyramid. While both are without doubt huge malls, an experience stood out the most while I visited these malls every time as a kid: it was pretty damn hard to look for a parking space!

Wouldn’t it be amazing if you can own part of these crowd-magnet malls, or get a share out of their profit?

Well, in a way, you can!

Today, I would like to talk about Real Estate Investment Trust (REIT), a personal favorite subject of mine.

Can you guess how much is the monthly rental of a little kiosk like this in Mid Valley? (Source: Mid Valley)

(1) What are REITs?

Real Estate Investment Trusts (REITs) are companies that own and/or operate real estate. Publicly listed REITs are traded just like any stocks listed in the stock market, making it very easy to invest in REITs.

Some of the more well-known real estates that are part of Malaysia REITs portfolio include Sunway Pyramid (SunREIT), Mid Valley (IGB REIT), The Gardens (IGB REIT), KPJ Hospitals and Specialist Centers (Al-Aqar REIT), Pavilion (PavREIT), JW Marriott hotel (YTL REIT) and more.

In short, REITs are great investment instrument for those who wish to own or profit from popular and profitable real estates – where others spend and consume on these places, you profit from them.

Source: Sunway City

(2) How do REITs make money?

To recap, REITs are companies that own and/or operate real estate. When it comes to real estate, it is not hard to understand the underlying business model of REITs – a.k.a. How do REITs make money?

Mainly, REITs make money through rental income from the real estates that they own and/or operate.

As an example, IGB REIT’s income is derived from the rental collected from its tenants for both Mid Valley and The Gardens Mall.


(3) Why Invest in REITs? – the Pros of REIT Investment

REITs are especially well-received among people longing for long-term investment for some of the reasons below:

a. High proportion of Income Distribution

In order to be qualified as a REIT, companies are required to pay out at least 90% of its net income as dividend to their investors.

Which lead me to my second point…

b. Attractive Dividend Yield – making it a great passive income stream

Due to the dividend payout nature of REITs, dividend yield from REITs is generally better than typical stocks dividend in the market.

In general, Malaysian REITs yield a decent 5% – 7% dividend on a yearly basis. Aside from that, should investors time their entry point properly, they are also able to enjoy growth from capital appreciation as well. (eg. Buy at RM1.00/unit. A price rise to RM1.20 will make up to 20% capital growth for investors)

Yield Performance of REITs vs other instruments.
Sources: Respective instruments' official page, CEIC Data

c. Relatively less risky than typical stock investments

REIT investment is also relatively less risky compared to typical stock investments due to most REIT’s business model that lock in tenants for at least 1 – 3 years, ensuring a relatively stable income stream for REITs.

REITs volatility in comparison to the market. (Source: Investing.com)

(4) Cons & Risks of Investing in REITs

a. Less capital growth opportunity

Due to its nature of being more stable in relative to typical stock investments, REITs growth in revenue and profit is often predictable, making it less exciting for short-term speculators and traders to speculate the REIT sector.

In other words, REITs growth are more likely supported by its fundamental business growth – making REITs an answer for those who seek long-term investment opportunities, but not so much for short-term speculators and traders.

b. Exposure to Market Fluctuation

Unlike conventional real estate investment, publicly listed REITs are also constantly exposed to a certain degree of market fluctuation due to its nature of being listed in the stock market.

Meaning, regardless of the fundamental stability of a REIT business, REITs are still prone to a certain degree of price fluctuation in the market.

c. Change in Portfolios’ Fundamental

Similar to conventional real estate investment, REITs also have the risk of having a strong income-producing real estate turning otherwise due to changes in market demand or fundamentals.

As an example, Sungei Wang Plaza (CMMT) and Subang Parade (Hektar REIT) used to be the to-go malls in the 90s, yet the rise of more attractive malls eventually replaced their glory.

Subang Parade - once known as the longest shopping mall in Southeast Asia. (Source: Subang Parade Official Facebook Page)

(5) How to Invest in REITs?

There are both private (Alpha REIT) and public-listed REITs (eg. SunREIT, IGB REIT, Axis REIT, YTL REIT) in Malaysia.

Generally, the easiest and most common way for one to invest in REITs is through the stock market, as there is where one can find publicly-listed REITs to invest in.


No Money Lah’s Verdict

Personally, I find REIT investment relatively simple to understand and work around, due to its business model that is (most of the time) straightforward.

In a way, REITs allow retail investors to invest in a portfolio of income-generating real estates, while enjoying the convenience of participation of the stock market. (eg. Buy and sell as instantly as you please, unlike conventional real estate/property transactions)

With that in mind, I believe that there is no harm to have REITs in your investment portfolio.

In the coming posts, I will dive into the different type of REITs and an overview of REITs in Malaysia, so stay tuned!

Do you invest in REITs? If you do, what REITs have you been investing lately? Would love to hear from you!


p.s. REITs are my personal favorite when it comes to long-term investment due to its decent dividend and simple-to-understand business model.