After spending more than three decades in the property sector with the last 10 years doing strategic advisory work in Japan, Indonesia and Singapore, I have always been fascinated with property trends in Asia especially related to investments from the perspective of an active investor.
Fundamental opportunities
When news broke out last year that REIT (Real Estate Investment Trust) stocks will be debuting in the local exchange, I felt a sense of relief not just because of the tremendous boost REITs can do to the capital markets but also because it sends a powerful message based on two fundamental opportunities.
First is that the domestic market is ready to reopen amid the challenges arising from the COVID-19 pandemic, and second, that after more than 10 years of patiently tracking, observing and advocating (sometimes arguing) with regulators, the REIT Act has finally taken off.
Just for context, REIT is a creation of Republic Act (RA) No. 9856, otherwise known as The Real Estate Investment Trust Act of 2009. It was enacted to encourage and promote participation of local investors in the ownership of real estate in the country, leveraging the capital market as a platform to help finance and develop infrastructure projects and provide protection to investors under a regulatory framework and fiscal incentives.
Unfortunately, when the law was passed, not one REIT corporation was established and had applied for board listing. When my team researched further, it was clear that investors and developers’ view on many factors raised doubts on its viability.
In short, there were too many pre-conditions that effectively deterred stakeholders (minimum public ownership rules, value added tax, etc.) from participating.
Picking the REIT stock
I decided to write about REITs to help investors understand how this kind of stock really works in simple, straightforward language. That way when you start picking the right REIT stock, you will be able achieve a better understanding of your investment.
REITs in Asia have been around for close to two decades. It emerged in Asia in 2001, with Japan and Singapore as the market leaders and South Korea, Taiwan, Hong Kong, Malaysia and Thailand launching their REITs as well.
Despite the popularity of REITs in other countries, many investors are unsure as to what to make of this asset class.
Fundamentally, it is similar to a real estate asset in that it owns physical assets, and earns rentals from tenants but its stock prices seem to act like that of any other stock. There are times its movement is volatile so in some respects it can be risky especially for first-time investors that are not used to unexpected changes.
But there will always be risk for any investment that provides solid and stable returns.
By and large, when I asked many of my colleagues in the region especially in Singapore and Hong Kong, their collective answer is they have achieved capital gains and earned regular income from strong REITs that they have been holding on for years.
The biggest attraction about REITs is that it is a very simple business to understand. Why? The REIT stock that is currently being traded is known as an Equity REIT. It is the most common type of REIT and has a straightforward business model: has a few properties, managed by a team of people that leases the spaces and collects rents on the properties, then distributes that income as dividends to shareholders.
Unlike many stocks, virtually all the information needed to understand REITs is publicly available. Therefore for purposes of sharing regulatory rules like tax benefits, exemptions, relaxed MPO rules, etc., I leave it up to investors to research these provisions.
Advantages of investing in REITs
A REIT is similar to a brick-and-mortar real estate in that it is a company that owns and operates properties and receives rental income from its tenants.
As an investor, you are actually buying a share in the underlying property of the REIT (for example, offices). The REIT is then traded in the stock market like any other stock, allowing investors to easily buy and sell units. This makes REITs a much more liquid investment as compared to a physical property.
Investors also benefit from regular dividend payments (from rentals paid by tenants) and can also enjoy share price appreciation similar to any other stock.
Strong, stable
When you really dive deeper into long term investing, REITs can play an important part in any investment portfolio because they can offer a strong, stable annual dividend and the potential for long-term capital appreciation.
In many countries, REIT’s total return performance for the last 20 years has outperformed many indices and the rate of inflation.
And as with all investments, REITs have several advantages. It is a form of investment that is easy to buy and sell and, performance-wise, REITs offer attractive risk-adjusted returns and stable cash flow.
For those engaged in serious investing, having a real estate portfolio in the form of a REIT provides diversification and dividend-based income—and the dividends are often higher than you can achieve with other investments.
In summary, a REIT investment offers liquidity, diversification, transparency, stable cash flow through dividends and attractive risk-adjusted returns.
As a parting note, I have always believed that a steady approach to investing and learning about REIT is the way to go in building your wealth with minimum downside risk and I hope that this piece of information was able to contribute in deepening your knowledge about this distinct asset class we now refer to as REIT.