REIT in Malaysia

Real Estate Investment Trust (REIT) Malaysia – Introduction

Posted by

Real Estate Investment Trust is also known as REIT. Perhaps, it may not sound unfamiliar to you if you have been investing in the stock market. Among other reasons, the popularity of investing in REIT has surged over the years due to its high dividend yield. So, what exactly is a REIT?

The Mechanism of a REIT 

REIT is a company that gathers money from investors to invest in a portfolio of income-generating real estates. REITs are listed on stock market exchanges just like the FBM KLCI in Malaysia. 

The most distinctive characteristic of a REIT is that it has to pay out at least 90% of its yearly income to enjoy tax exemption. Therefore, it generally provides relatively higher dividend yield, making it an attractive choice to most stock investors.

Investors are able to own a small fraction of commercial real estates by way of owning the shares of a REIT. Imagine you are one of the owners of the Midvalley shopping mall. Not only you are entitled to stable cash inflows through rental in the form of dividend distribution, there are also experts managing the property on your behalf. 

Without the REITs, retail investors would otherwise impossible to gain any investment exposure to the expensive commercial real estates. 

The whole mechanism is made up of a few major components as follows:

REIT structure
The Structure of a REIT

1. Management Company

The management company is a company that establishes a REIT. It issues the units for private investors or the public to subscribe. The management company also operates and manages the REIT. It appoints a property manager to manage the real estates.

2. Trustee

A trustee is a trust company registered under the Trust Companies Act 1949 or incorporated under the Public Trust Corporation Act 1995. A trustee is responsible to act on behalf of the unitholders (investors) and safeguard their interests.

3. Property Manager

The management company appoints a property manager that possesses relevant expertise in managing commercial real estates. A property manager is responsible for the day to day property management activities such as rental collection, facilities management, compliance, maintenance, etc. The company pays a management fee to the property manager to undertake such activities. 

4. Unitholders (Investors)

Last but not least is the unitholder. Unitholders are investors who hold the shares of a REIT. Unitholders receive dividends in return. 

Benefits of Investing in a REIT 

REIT is a must-have for most stock investors who focus on building long-term wealth. Investors benefit from regular income distributions as well as long-term capital appreciation. 

It’s also attractive to those who are new to investing in stock market as it generally has lower volatility and high dividend yields.

Here are the main benefits of investing in REITs.

1. Highly Liquid

For those who have ever bought a property for investment purposes would possibly understand the pain of the average landlords. 

From selecting a strategic property, applying for bank loan, dealing with agents to securing tenants, all just seem to be too overwhelming for the millennials nowadays. 

Worse, unlucky landlords could possibly hook up with terrible tenants who never pay rent on time and turn the property into a mess.

Investing in real estates has never been easier through buying and selling REIT stocks. All the cumbersome paperwork of owning a physical property is no longer a concern. You can buy and sell the shares of the REITs anytime as you wish. Besides, you can convert your investment into cash easily when emergency needs arise. 

2. High Dividend Yield

As mentioned earlier, a REIT company has to distribute at least 90% of its yearly income to enjoy tax exemption. Simply put, the rental income received by the company is not subject to corporate tax if it distributes 90% of the income to the unitholders.

That could easily translate into 5% – 6% yearly dividend yield on average. The best part is that the distributions are pretty much predictable as the cash flows are supported by long term leases entered into with the tenants. The sustainability of the earnings alongside with its high dividend yield makes it attractive to most stock investors.

3. Diversification

REITs also have a low correlation with other asset classes like stocks and bonds. Therefore, investing in REITs can effectively diversify your investment portfolio. Investors generally perceive real estate investment as an excellent hedge against inflation in the long run.

In contrast to owning a physical commercial real estate through bank loans, investing in REITs also reduce your risk of being over-leveraged. 

It’s not uncommon to hear the stories of people getting into bankruptcy when they fail to service their mortgage loans. Investing in REITs allow you to invest only the amount that you are comfortable with.

4. Low Initial Requirement

You can invest in a REIT stock with less than RM200 by purchasing a minimum block of 100 shares. It would otherwise impossible for an average investor to invest in commercial real estates unless hitting a million Jackpot.

REIT stocks have proven their ability to generate a positive expected return over a long-term investment horizon. Below are the historical charts for both IGB REIT and SUNREIT.

IGB REIT historical chart
IGB REIT historical chart (Source: Yahoo Finance)
Sunway REIT historical chart
Sunway REIT historical chart (Source: Yahoo Finance)

The charts above only depict the capital appreciation of holding the stocks before taking into account the yearly distributions.

The upward bias in REIT stocks allows you to build a sustainable passive income portfolio through dollar-cost averaging strategy. You can buy a fixed RM amount of REITs every month using your savings regardless of the stock price.

In the long run, you will benefit from the total returns that comprise both capital appreciation and regular dividends.

5. Professionally managed

The real estates are typically managed by a property manager with vast experience in the relevant field. It will take care of all the hassle of managing the property like collecting rents, facilities management and whatever ancillary services.

What you need to do is just chill and relax while waiting for the incoming distributions once in a while.

An Overview of REITs in Malaysia

The market capitalisation of the REITs has grown at an exponential pace over the past decades. As a result, Bursa Malaysia has introduced the all-share REIT index in 2017 to track the performance of the listed REITs.

To-date, there are 18 REITs listed on FBM KLCI.

Summing-Up

In a nutshell, you may not want to miss having REITs in your investment portfolio if you wish to build a sustainable passive income portfolio.

However, just like other asset classes, REITs are not risk-free investments. No doubt they have lower volatility due to their ability to generate predictable cash flows. 

Nonetheless, REITs are still subject to price fluctuations due to their susceptibility to different market risks. This is particularly inherent during a rising interest rate environment and the increasing trend of oversupply of office or retail spaces in Malaysia.

Therefore, they are more suitable for investors who have a long-term investment horizon. As a word of caution, you still need to do your own due diligence before buying into any REIT stock. Don’t buy an over-valued stock to avoid having a high downside risk in the event of a recession or financial market collapse. 

Invest in REITs is similar to buying other listed shares. You need a stock trading account to start investing. (You may refer to the guide to opening a stock trading account in Malaysia.)

Leave a Reply