Pros and cons of investing in REITs
Real Estate Investment Trust (REIT) is an attractive alternative investment option.
A REIT, to put it simply, is a pool of funds invested in real estate assets. It’s like a mutual fund but instead of investing in several listed companies, it invests in income generating real estate assets. It’s a great way to invest in real estate with the same tradability feature of a stock, since the REIT itself is listed in an exchange.
Having REITs in your portfolio is an excellent way to receive a steady stream of cash through cash dividends and at the same time there is also a potential for capital gains.
Best of both worlds, right? But there is no such thing as a perfect investment. All investments are subject to market risks therefore, investments, whatever type it is, always carry risks. But before we go into the cons, let’s first discuss the pros of investing in REITs.
1 Accessibility, diversification
The first benefit in investing in a REIT that I would like to highlight is accessibility and diversification. You do not need to put up several billions of capital to own three buildings in the Makati central business district. By investing in a REIT for as low as a few thousand pesos, you can already be a part owner of the company that owns and manages those three buildings. It also offers you diversification since REITs often own more than one real estate asset—it owns several quality assets.
Another key feature of a REIT is its liquidity. It trades like a stock. You can buy one at the opening of the market and sell before the market closes. Direct real estate investment is notoriously illiquid especially in a weak market. You cannot just decide now to sell your house, condo or building, then have a buyer and get fully paid the next day, right?
3 Professional management, transparency
Third is professional management and transparency. REITs have experienced institutional management. Companies which offer REITs have proven track record with several years of industry experience and are backed by adequate capital. You won’t see any fly by night real estate companies offering REITs. Well, it won’t pass the rigorous requirements of the Securities and Exchange Commission and the Philippine Stock Exchange anyway.
REITs provide a steady stream of cash dividends to the investors. These dividends come from the income generated by the real estate assets, which in turn come from contracted rental cash flows. Since it comes from rental income, investing in REITs provide you with stable recurring dividends every year. Also, the dividend yield from REITs are generally higher than those offered by stocks. On top of that, you can have potential capital gains by investing in REITs. As a matter of fact, REITs have generally outperformed stock market indices in the last 10 years.
But as mentioned earlier, any form of investment carry risks. REIT share prices can drop as property values fall. Since REITs are tradeable like a stock, share prices can fall with the broader stock market based on supply and demand of its shares.
It’s much more volatile if you compare it to the market value of properties which generally experience steady increase in value over time. Revenues of a REIT company can also be hurt by falling occupancy rates and increasing vacancy rates.
While investing in REIT offers you more diversification, its income base is not as diversified as that of a large public company. Let’s say a REIT went into IPO and listed its four prime real estate properties in Metro Manila. When something happens to one of its four buildings, its rental income will be severely affected thus the dividends that investors will receive will also be greatly affected.
Overall, the advantages of investing in REITs still outweigh its disadvantages. It is a great investment instrument that even first time investors should consider.
The author is a licensed stock broker from AP Securities and a Certified Securities Specialist. He also underwent PSE’s REIT training program.