A REIT, short for Real Estate Investment Trust, is essentially a company that owns a portfolio of properties. The company then hires a property manager to manage the day-to-day operations at the properties, such as collecting rents, negotiating tenant contracts and finding tenants. When investing in a REIT, you are becoming a beneficiary of the trust that owns the assets, in the case of FCT, the Singapore properties and units in H-REIT.
Typical structure of a REIT
Now let’s discuss a typical structure of a REIT using Frasers Centrepoint Trust (FCT) as an example. The diagram below is a clipping from FCT’s Annual Report. It shows the relationship between the different players, and the difference between these groups: unitholders (you), property manager, REIT manager, and trustee.
Source: FCT 2014 Annual Report, author’s own input
As a unitholder, you are legally entitled to collect tax-free quarterly distributions (dividends). A REIT is required to pay out at least 90% of its distribution income to unitholders, should it be exempted from corporate tax. This is why most REITs investment are mostly focused on the trust’s yield.
How does REIT achieve growth?
Most REITs could undertake three forms of organic growth: increase rental, asset enhancement initiatives (AEIs) and capital recycling. Basically, the REIT can
- Increase the rent of their existing properties and increasing revenue
- Renovate their current properties to improve its floor space or rental rate
- Sell off unprofitable or properties with unattractive yields
To experience inorganic growth, the REIT could either acquire other properties or conduct greenfield developments.
Therefore, for any investor interested in REITs, it is important to know how the REIT achieved its distribution yield, how it can sustain it without leveraging too heavily and how it can grow its distribution and the value of its assets in the future.
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