Thinking of investing in REITs

So I’ve been thinking recently about opening a stock trading account for the first time and buying some shares on the Kuala Lumpur Stock Exchange. Granted, I already have money in various unit trust funds and insurance saving products, so I’m already indirectly invested in the markets, but I’ve never actually purchased shares for my own account before. What prompted the current interest is what looks to me like ridiculously attractive dividend yields on many of the REITs being traded here and the intense discussion this has generated on the Low Yat forums.

According to a popular blog on the subject that I’ve been folllowing on and off for the past couple of months, the average yield on the REITs based on current prices is a delicious 8.84%. One of the REITs most popular with the LYN folks, Axis, is listed as having a yield of 10.4%. Even better, Axis has a policy of redistributing 95% of its income and has recently moved to a quarterly distribution policy, meaning you get a nice fat cheque every 3 months.

In theory, investing in a REIT should be approximately similar to investing in property yourself, except that in return for a management fee, you are spared from the hassle of actually scouting for good properties, arranging to buy them and finding and managing tenants for them. Since the REITs are all at least partially funded using loans as well, this means that their yields are inflated by leverage, just as an individual investor’s yield would be in buying a property personally using a mortgage.

Being the pessimist and financial conservative that I am, however, I’m still somewhat wary of something that looks too good to be true. For one thing, the yields looks so good and the size of the REITs so small (Axis is worth by my calculations a mere RM 380 million or so, Atrium, another popular REIT is worth only around RM 120 million in total) that I don’t understand why institutional investors don’t just snap the whole thing up. I see that the Employee’s Provident Fund is already the largest shareholder of Axis, at 7.59% of total issued units, but what’s stopping the big players from just taking over such a sweet operation?

As always, I suppose there’s the risk of property prices dropping, tenants leaving or not paying rent (I understand Atrium gave everyone a scare when it announced a lawsuit against a big tenant over rent arrears earlier) and the value of the REITs dropping due to the general market sentiment, but it still looks like a stupidly good buy to me. Am I wrong? I’d appreciate it if anyone has any interesting comments on this before I pull the trigger on this.

12 thoughts on “Thinking of investing in REITs”

  1. Assuming that you’re a Malaysian, you should check out this long thread on local REITs on the popular Lowyat.net forums here:

    http://forum.lowyat.net/topic/479946

    Basically, advantages: better diversification, ability to invest in property sectors that would otherwise be unaffordable, increased liquidity, no need to personally worry about finding tenants, collecting rent or maintaining the properties etc.

    Disadvantages: need to pay an annual management fee, the usual set of agency problems when you give someone else your money to invest on your behalf, possible collusion between management and big shareholders to the detriment of the small fry, possible fraud, price volatility due to being listed as an equity etc.

  2. I think large index funds are better right now, as the market is extremely volatile and could move in any direction. Gaining exposure to a large variety of investments is key to minimizing risk. I would hold off a few months until the Greece debt situation sorts itself out and we see how China deals with its housing bubble.

  3. Those who are thinking to invest in REIT they can get clear idea about it through this comprehensive website. Real estate investment in similar to investing in property and this REITs are partially funded by loans. Moreover people who are looking for some good real estate agents or dealers can go through this site or can contact at 0120-4338222 or 800-232-2343.

  4. REITs may seem better today, but as the saying goes, the world is round and anything could happen. If you are really into business, there is a need to take risk.

  5. There are always pro’s and cons in whatever line of business we choose. Everything goes with how the market plays stocks. With REIT, I think there should be no problem with that. Just try to keep updated about the business trending so you would know when to invest or not. Great post and nice discussion. 

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