A right time for REITs to shine

Posted on 13 Mar 2020
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People are shifting towards REITs as it provides them with an opportunity to invest in a large portfolio of real estate assets with lower risk, said Leong.

People are shifting towards REITs as it provides them with an opportunity to invest in a large portfolio of real estate assets with lower risk, said Leong.

By Joseph Wong

josephwong@thestar.com.my

Given the expected slow recovery of the real estate industry, many investors are relooking at their options to maximise their property portfolios but strangely enough many are still unaware or uncertain about investing in real estate investment trusts (REITs).

In fact, many are still of that mentality where investing in real estate means flipping for capital gains or going for rental yields.

But with the property market stuck at its current low levels, the question is: Can people still invest in property and expect a favourable yield? Given the slow property market, investors may have to turn their head towards REITs as this is the time when REITs shine.

Unlike first-time homebuyers who face difficulty in securing loans to buy their homes, first time REIT investors do not need to have huge sums of money. They can invest in smaller sums and add on to their investment over time.

And they gain quite a substantial dividend yield, usually double of that if they place their savings in fix or term deposits.

An opportunity to invest

“People are shifting towards REITs as it provides them with an opportunity to invest in a large portfolio of real estate assets with lower risk,” said Axis REIT Managers Bhd CEO Leong Kit May.

“REITs appeal to income-oriented investors as we are required to distribute at least 90% of the income to unitholders. Furthermore, REITs are being traded publicly on an exchange which provides investors easy exit plan.

“Unlike REITs, unit trusts linked to properties are non-liquid since they don’t trade. While they do provide some income, they don’t have the requirement to distribute 90% of their income to the unitholders unless stated,” she told StarProperty.

As for the short-term large sum fixed deposit, Leong said it appeals to the high-income investors as the minimum deposit is about RM500,000, which may be beyond the means of most investors.

There is a risk in every investment regardless how safe it appears to be. Every experienced investor knows this.  The difference is how high the risk is. There is an adage: High risk, high returns. Although it would be best described as the risk-return trade-off which indicates that the higher the risk, the higher the potential reward.

A savvy investor would know that by diversifying their portfolio, they can reduce their risk.

“Diversification will lead to lower risk,” agreed Leong, adding that many investors go by the rule of not putting “all your eggs in one basket”.

With the nation going through a rough patch with the Covid-19 contagion and the recent political instability resulting from the change in government, the market has become a little more volatile.

Bursa Malaysia’s KLCI index has taken a beating over the last few days falling to close at 1,419.43 on March 12.

REIT1

Established REITs perform better

For REITS, the more established ones have dividend yields that is mainly double that of the fixed deposit interest rates but there has a drop in dividend yields over time

Leong pointed out that the drop-in dividend yield is mostly due to the appreciation of the unit price like Axis REIT, Pavilion REIT and IGB REIT as investors were keener on stable defensive stocks especially when the market is volatile.

“The more established REITs generally perform better due to the volatility of the share market where investors shift their funds towards REITs to provide stability to their stock portfolio. REITs are generally labelled as defensive due to the high dividend yield and diverse property portfolio,” she said.

The advice for new investors is to study the market before making that first dip into REITs, according to a personal financial advisor.

“Given that some sub-sectors like industrial real estate are performing better, a good idea would be to your due diligence,” he said.

Increased demand for industrial real estate

Like the personal financial advisor, Leong is of the opinion that industrial properties are undervalued and underrated.

“Industrial properties continue to offer a lot of opportunities for investors as this segment has recorded strong growth for the past five years with yield of about 9-10%.

“Furthermore, Budget 2020’s allocation of RM550mil, to provide smart automation matching grants to 1,000 manufacturing and 1,000 services companies, will likely boost investments in the manufacturing industry which is in line with the recently unveiled Shared Prosperity Vision 2030. This will directly increase the demand for industrial properties,” she said.

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