Introduction of REIT Investing

If you happen to come across this blogsite and decide to read through some of our blog topics, you will found out that there is a huge posting or interest on REIT counters. One of the reason is that the contributors for this blog site has vested interest (including me) in the REIT counters currently trading in SGX market. So I decided to post some basic introduction of REIT.

Actually, REITs are considered quite new in the Singapore equity market, with the first two REIT floated in Singapore Exchange (SGX) in July 2002. Currently, there are about six REIT counters trading in SGX at this point of posting. You may want to visit StockPick created by KK (one of the BullRun contributor) for more detailed analysis of REIT counters.

A REIT is an investment vehicle that holds a portfolio of real estate assets primarily with the aim of generating income from the properties. It is set up as a closed-end investment trust, which means that no new shares or units are issued after the IPO. REIT will only issue new shares or units when the REIT manager decide to acquire additional properties. The sale of new shares or units will fund the acquisition. Once, the REIT start the debut trading, supply and demand will determine the market price.

Singapore REITs are required by law to hold at least 70% of their total assets in real estate assets and they are not allowed to engage in property development activities, whether on their own, through joint venture with other property developers or investing in unlisted property development companies. This mean that REITs are not exposed to the risks of property development.

Benefit of Investing in REITs

• Exposure to the Property Market - By buying REIT, you can own a stakes in the properties held by REIT.
  
• Portfolio Diversification - You reduce your risk as REIT normally hold multiple properties under it portfolio.
  
• Regular Income - You can expect to receive rental income generate by the properties held by the REIT.
  
• Potential Capital Gains - You can expect to reap capital gains if you sell your REIT shares at a higher price than you purchase.
  

Risks of Investing in REITs

• Deterioration in business conditions
  
• Increased supply of similar properties
• Early termination of lease by tenants
• Increase in Interest Rate
• Fall in Property prices

Factor to Consider when Buying REIT

• Type of Property Held by REIT - Industrial, Retail, Office
• Quality of Property
  
• Quality of Management
• Occupancy Rate
  
• Expenses
• Share Price Vs NAV of REIT
• Deferred Payment Scheme - For new acquisition or New IPO launch
  

Credit: Some of the information for this post is extracted from Benedict Koh and Fong Wai Mum book, Personnel Financial Planning