Investing in real estate investment trusts (REITs)

A lot of Filipinos work hard to eventually live on a house they can call their own.

Realistically speaking, acquiring real estate seems to be out of reach due to the expensive capital requirement, and the financial burden to maintain a property. But what newbie investors may not know is that today, they can still add real estate to their investment portfolio without spending a fortune.

Real estate investment trusts (REITs) offer a way to invest in the real estate sector, minus the millions of pesos in capital requirement, minus the hassles of dealing with tenants, minus the repairs, maintenance, insurance and tax expenditures. Read on to understand more about REITs and how you can start investing in them.

What are REITs?

REITs are corporations that own and operate income-generating real estate properties. They make money by collecting rent and other fees from their tenants.

Assets may include residential and commercial properties like malls, hotels, condominiums, parking facilities, warehouses, factories, solar farms, and office spaces as well as infrastructure projects such as highways. By investing in REITs, you become a part owner of these portfolios of properties without the need to invest huge sums of money.

How do REITs work?

To understand how REITs work, here’s a quick overview of how a REIT is established in the Philippines.

A real estate company sponsors the creation of a REIT by providing and transferring income-generating real estate assets into the REIT. The sponsor then fulfills all requirements under the REIT Act (Republic Act No. 9856) and files an application with the Philippine Stock Exchange (PSE) and Securities and Exchange Commission (SEC). If approved, the REIT can start selling its shares on the stock market via an initial public offering. This is when individual investors can take part in the growth of a REIT.

By law, REIT companies must sell at least one-third of their outstanding capital stock to the public and reinvest the proceeds in the Philippines. They are also required to pay back 90 percent of their earnings to investors by way of cash dividends, credited directly to their stock brokerage accounts on a quarterly basis.

How to invest in REITs

To earn from a REIT, you can buy shares during the IPO or from traders on the secondary market. There are brokerage platforms that allow you to purchase shares entirely online.

First, find an accredited brokerage firm and create your online trading account. Your broker will ask for your consent to open a Name-on-Central Depository (NoCD) account, which is required to trade through the PSE.

FirstMetroSec, the stock brokerage arm of the Metrobank group, is one of the few REIT-accredited brokers. Opening a FirstMetroSec account will not only give you access to REITs, but also to stocks, mutual funds, UITFs, ETF and even corporate and government bonds all in one account. Simply download the “FirstMetroSec GO” mobile app or visit www.firstmetrosec.com.ph to open an account fully online, completely paperless all in under 10 minutes. Once your account is activated, you can already start adding REITs into your portfolio.

Not all REITs are created equal

Remember to do your research when choosing which REITs to buy.

First, check the asset mix. What types of properties does the REIT have in its portfolio? Are they catering to growing industries? Is there high demand for such assets in their location? The mix of properties will tell you the unique opportunities and risks each REIT may face.

Look at the REIT’s dividend history so you’ll know what you can expect to earn. Take note of any up or downward trends as well as how it manages during hard times.

See if the REIT’s properties have reputable tenants. The quality of tenants can affect the stability of a REIT’s income and therefore have an impact on your earnings. Green flags include large companies that rent office or commercial spaces under long lease agreements.

Also check opportunities for growth. Know the sponsor of the REIT you plan on purchasing. If the sponsor company has solid plans for expansion, it may be able to add more assets to the REIT’s portfolio.

After doing your research and identifying the REIT/s you want to buy, it’s time to put your money to work. You can buy REITs during an IPO, which happens within a certain period. If you missed out on that chance, you can still buy REITs from the secondary market just like other regular publicly-listed stocks.

Earning from REITs

There are two possible ways to grow your money from REITs. One is through dividend payouts and the other is by trading on the stock market.

REITs are legally obligated to pay dividends to shareholders, unlike regular stocks that can choose not to. Dividends are usually paid out every quarter and may come in the form of cash, property, or stock dividends.

Since they offer returns that are predictable in terms of schedule, REITs are a good option if you’re investing to have a secondary source of income. The amount you’ll receive, known as the dividend rate, will depend on how much the REIT earns.

REITs are listed on the stock market and so the rules of capital appreciation apply. This means you’ll make a profit when you buy low and sell high. If you don’t need the cash right away, it may be better to hold on to your shares and benefit from potential long-term growth.

Pros and cons of investing in REITs

To know if REITs belong in your portfolio, check if their features match your risk tolerance, goals, and time horizon. Here are some advantages and disadvantages of investing in REITs to help you decide better.

Pros

• More affordable than buying properties
• More convenient than managing properties yourself
• Diversification through a mix of real estate assets
• Managed by professionals (property manager, admin manager, fund manager)
• Regular earnings via guaranteed dividends from 90 percent of the REIT company’s income
• Highly liquid as shares are relatively easy to buy and sell

Cons

• Like stocks, REIT share prices are subject to risk and market volatility
• Rising interest rates can pull down the demand for REITs, ultimately affecting their price
• Income may decline if rental demand is low, resulting in lower dividend rates

Through REITs, investing in real estate is no longer a rare opportunity reserved for a few. The public can now take advantage of an asset class that makes real estate more accessible.

The author, CIS, CSR, CTP, CUSP and CFMP, has 18 years of experience as an an entrepreneur, real estate investor, stock broker, financial literacy advocate and a public speaker. He is the vice president and head of Business Development and Market Education departments together with the OFW Desk of First Metro Securities Brokerage Corp. He also sits in Metrobank’s Financial Education Editorial Advisory Board. He may be reached via andoybeltran@gmail.com