The Basics of a Real Estate Investment Trust (REIT)
In a previous article, an introduction on Malaysia’s REIT market was introduced. Now, let’s take a look at some of the characteristics and benefits of these Real Estate Investment Trusts (REIT).
A Real Estate Investment Trust (REIT) is a collective investment vehicle designed to invest in a diversified pool of properties such as hotels, commercial buildings and offices which are actively run by professional managers. REITs are part of a larger group of publicly-traded real estate securities including real estate operating companies (REOC) and mortgage-backed securities (MBS). In addition, REITs are an innovative way for property companies such as Capitaland Ltd (SGX: C31), City Developments Ltd (SGX: C09) and Keppel Land Ltd (SGX: K17) to be able to “recycle” their capital through spinning off some of their properties while retaining ownership on these assets.
The Singapore REIT (S-REIT) market was founded in 1999 and regulated by the Monetary Authority of Singapore. CapitaMall Trust (SGX: 38U) was the first S-REIT to be listed on the exchange. Today, there are more than 20 different REITs listed on the Singapore Stock Exchange such as SPH REIT (SGX: SK6U), Starhill Global REIT (SGX:P40U), Parkway Life REIT (SGX: C2PU) and Hong Kong’s Fortune REIT (SGX: F25U).
Characteristics of an S-REIT
S-REITs are a closed-end fund which can either be a corporation or a trust. Their assets must have at least S$300 million with 25% of their units issued to be held by at least 500 public unitholders (i.e. shareholders). Below is a typical structure of a listed S-REIT:
Source: Asia-Pacific REITs, CFA Institute
An S-REIT can borrow up to 35% of the investment trust’s deposited property. If a credit rating is obtained and publicly disclosed, the threshold can be raised up to 60%. As long as the leverage is more than 35%, the credit rating must be maintained and disclosed to the public. As REITs require leverage to operate their business, investors should focus on the aggressiveness of REIT managers on the trusts’ capital structure.
3. Dividend payout
At least 90% of taxable income from the investment trust’s assets must be distributed to its unitholders annually with any undistributed taxable income subjected to a 17% corporate tax rate.
4. Secondary Equity offerings
As REITs distribute most of their earnings, future asset acquisitions have to be financed by issuing shares in addition to the debt which REITs have to borrow. As such, REITs issue more frequently as compared to non-real estate companies.
Benefits of a REIT
Investors typically enjoy a high dividend yield as REITs distribute most of their earnings to shareholders in order to maintain their tax-exempt status. Moreover, owning a REIT provides investors flexibility through exposure to the various types of properties without having to own the entire property themselves. As REITs are traded on an exchange, these investment trust vehicles also provide investors with the liquidity to sell their share of REITs in the secondary market.
Value in Action
A Real Estate Investment Trust (REIT) invests in real estate funded both by debt and equity. Investors typically enjoy relatively higher dividend yield versus a non-REIT company as REITs have to distribute most of their earnings to shareholders in order to maintain a tax-exempt status. As such, investors must understand how REIT managers control their capital structure (i.e. aggressiveness of debt issuance).
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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.
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