“Give me 35 seconds of your time, and I will teach you how to make millions”. If you are familiar with this phrase, you would most definitely have heard of gurus claiming to teach everyday individuals like you and I on how to accrue wealth, be it through e-commerce, stocks and even real estate. This article is not to discuss the legitimacy of these claims, but to drive at the reality that there is no one correct formula to investment.
Investments are highly tailored to personal preference, based on risk appetite amongst other factors. REITs remain as one of the choice picks amongst investors for the reason that they remain relatively low-risk, yielding dividends between 4% to 6% which are much more attractive than government bonds yielding an average 2.56%. But how do they fare against other forms of investments? In this article, we will be analyzing the pros and cons between REITs against other investment forms to enable you to make an informed decision when it comes to allocating your resources!
For beginners, the full term for REITs is Real Estate Investment Trust. How a REIT works begins with a company which pools together sums of money from willing investors, using it to purchase real estate that generate income streams. Examples of REIT companies include CapitaLand Ascendas REIT, Mapletree Logistics Trust and Parkway Life REIT. From the income that is generated via rental, a portion of it is given back to investors as dividends, known otherwise as returns on investment.
However, not all REITs provide the same risk-and-return profile. Because dividend yields depend on rental income, it would depend on the profitability of the development invested into. A REIT that invests mainly in hotel and tourism facilities previously suffered at the hands of COVID-19, with tourism numbers evaporated and developments finding it hard to retain tenants. It was found that several hospitality REITs including CDL Hospitality Trust, Far East Hospitality Trust and Frasers Hospitality reported negative declines in revenue ranging between -17% to -41%.
This proves that while REITs have generally been considered as one of the ideal options for any risk-adverse investor, they still possess respective risks and require a certain level of awareness and long-term planning! Here are the pros and cons of REITS:
Real Estate Investment Trust (REIT) vs Traditional Property Rental Income
Then the best thing about REITS is that you “own” a property without actually owning it. The traditional fashion to using real estate for investment is by owning a property by becoming a landlord and renting it out to collect rental income from tenants.
However, this mode of investment can be rather laborious and stressful on the landlord. Being a landlord, one is responsible for the maintenance of the property, whether vacant or occupied. Additionally, there is a risk of having months of no tenant occupancy, in which rental income dwindles. This can prove to be financially risky, especially if leverage in the form of bank loans were taken.
On the other hand, REITs allows an investor to have a stake in the property, without him having to personally manage the tenants and the property itself! The best part about REITs is that the Singapore law mandates that REIT companies distribute at least 90% of all taxable incomes to respective investors. In other words, it is almost a guarantee that steady recurring income will be paid out either quarterly or bi-annually. Just like stocks, REITs are very much subjected to fluctuations based on demand and supply.
Should the REIT price go up, an investor has an option to dispose of his shares in the REIT company in return for profit. The problem with REITS is that the share price of a REIT may go down while still paying out dividends. This means that REIT investors may receive regular payments, they may be holding on to less profitable REIT shares that may be underperforming. In some ways, it can be said to be less upfront and obvious when a REIT is faring poorly compared to other modes of investment such as stocks that generally have very visible signs of poor performance.
REITS vs stocks
Stocks can be said to be more volatile than REIT counterparts with several reasons accounting for this. First, stocks are based on market expectations and emotions, which can fluctuate and move based on news updates about global and domestic affairs. While REITs do also operate on the basis of supply and demand, REITs tend to have lower fluctuations. The reason being, tenants occupying spaces in REIT company-owned spaces are bounded by leases and contractual obligations, which often span several months to years on end.
Hence, the barriers to entry (or leave in the case of crisis) are much higher and less fluid compared to stocks which can be bought or sold within minutes. A major loss in REITs is unlikely to happen immediately overnight, but rather over prolonged periods of poor market conditions such as COVID-19, which resulted in hospitality and retail tenants facing tremendous difficulty in sustaining business earnings.
Another benefit of REITs compared to stocks is the provision of skills and expertise. For those who are new to the arena of stocks and trading, it is assumed that only basics are mastered, and the rest depends on ‘luck’. It can be quite a gamble, especially if sufficient experience is lacking to ‘spot’ a good stock purchase. Most definitely, “higher risk, higher return”, if you manage to catch a good wave and purchase the right stocks. Some stocks including Tesla and Apple are just some of the out-of-the-ordinary examples of a good stock purchase, offering returns in the double to triple digits!
However, it is not everyday such unicorn stocks are up for grabs. For those who want a decent return, REITs could be a better bet. Subtracting 2% inflation, REITs can offer a decent return of 3-5%, much better than what most banks are offering today for money in your savings account! The best thing about REITs is that you do not require as much experience, but sufficient due diligence is still required! REITs are a good place to start for young investors who may not have much cash on hand, with share prices starting from just a few cents.
We hope that this article has provided you with some insights into the world of REITs. Do note that this article is not sufficient as a sole source of financial advice, it is key to speak with a professional who can best guide you on your journey to investing smart!
