Real Estate Investment Trust (REIT) In Malaysia
When the KL Pavilion Real Estate Investment Trust (REIT) was unveiled in 2011, most thought it was just hype that would soon die down. However, if one takes the time to chart the growth of REITs in Malaysia, an amazing investment fairy tale will unfold – revealing an attractive income-generating asset.
What is REIT?
REIT is a collective investment vehicle that pools money from various investors to raise capital to buy and manage real estate assets ranging from office and apartment buildings to shopping centers and warehouses.
These real estate assets are managed by a Securities Commission (SC) approved management company and are often held with the primary goal of generating rental income, which will be distributed to shareholders (i.e. investors) in the form of dividends.
How do you invest in REIT?
Much like stocks, a common way to invest in REITs is through a broker who will assist you in buying and selling REITs listed on Bursa Malaysia. Alternatively, you can consult online listings of Malaysia’s REITs.
As a REIT holds rental properties and its main income is from rental, which is a fairly consistent source of income. So, if a REIT pays out at least 90% of its taxable profit as distributions to investors, the income stream should be fairly consistent.
In addition, returns are also generated from capital asset appreciation as a result of holding the real estate assets over a long period of time.
What to consider when investing in REIT?
Like with all investments, there are a number of things that you should lookout for to ensure your money is put in the right places. Here are a few things to consider when it comes to REIT:
1. Dividend payout
As an investor it is imperative that you invest your money in a REIT that has an increasing dividend payout. With ever rising cost of living and inflation, your investment should preferably yield a dividend of between 6% and 8%.
The company managing the real estate assets must be actively acquiring and improving on their assets. Growth in this regard will contribute to growth in dividend payouts.
3. Diverse portfolio
Ideally, the real estate assets held and operated by the managing company should include properties across several industries (e.g. industrial, commercial, residential and healthcare).
The reason behind diversifying is so that rent from one class of property that is performing well can make up for a different class of property that is not yielding as much rent income.
As operation cost rises, many companies are finding their bottom line affected pushing them to take up debt to fund growth. When a company takes on too much debt, they are regarded as being highly geared, which may cast doubt on their ability to perform.
Why invest in REIT?
One of the biggest benefits of investing in REITs is the income tax exemption. Most income earned by unit trusts and REITs are exempted from income tax when received by unit trusts and REITs.
On top of that, tax on moving of properties is also specifically exempted. In fact, Malaysia was the first country to provide zero tax moving costs to REITs and property sellers.
Some of the most obvious reasons people turn to REITs as the new investment kid on the block can be attributed to the positive outlook on Malaysia’s property market for 2014, as well as, the attractive investments returns.