REIT (2)

What is REIT?

Real estate investment trust or REIT is a collective investment vehicle (typically in the form of a trust fund) which pools money from investors and uses the pooled capital to buy, manage and sell real estate assets, such as residential or commercial buildings, retail or industrial lots, or other real estate-related assets (e.g. shares in public-listed property companies, listed or unlisted debt securities of property companies etc.).

It is a passive investment vehicle which acquires and holds income generating real estates.

REITs are driven entirely by recurrent rental income from real estates and with the present tax structure governing REITs, distribute at least 90% of its income to unit holders, thus providing stable and consistent income to unitholders.

The objective of REITs is to obtain reasonable investment returns.

Total returns are generated from the rental income plus any capital appreciation that comes from holding the real estate assets over the period.

Unit holders will receive their returns be in the form of dividends or distribution and capital gains for the holding period.

REIT is an asset class that sits between bonds and equities.

Its features are more similar to bonds than equity stocks.

With their regular and stable yields, REITs should appeal to risk averse investors.

REIT (1)

REIT Demystified

To most people, real estate investing is limited to residential ownership with little thought of owning shopping complexes, industrial warehouses or office buildings etc.

Now, real estate investors can literally stretch their investment horizon with REITs (pronounced “reets”) which combine the best features of real estate and trust funds.

They give an investor a practical and effective means to include professionally-managed real estate in a diversified investment portfolio.

It also allows small investors a means to invest in real estate assets through a vehicle that is highly liquid compared to buying a real estate itself and with a smaller investment capital.

Diversify

If there's one solution that keeps jumping out to you in how to manage away a lot of the risks in investing, it's diversification.

Diversification means 'to spread it around', that is, to spread your money over several, not one, investments.

Like not putting all your eggs in one basket, for if you drop the basket, chances are they will all break.

Likewise, if you sink all your money into one stock and if that stock plummets in value, you could lose all of your money.

Generally, a diversified investment portfolio has different baskets of investments so to speak.

Each basket could be likened to an asset group (like stocks or bonds or futures).

The next step is to further diversify within that asset group.

Hence buying stock means buying stocks of various sectors, or buying unit trust means buying more than one kind of unit trust fund (there are income funds, growth funds, bond funds etc.)

The strategy is to mix high-risk and low-risk investment vehicles and to allocate them wisely among your baskets and within each basket. Why?

So that you have a better chance of winning within an asset class and among the asset groups.

Imagine the unfortunate circumstance of having all your savings tied up in the stock market and needing immediate cash but the stock market remains stubbornly bearish.

This is not diversifying among asset groups.

Or putting all your money into property shares only to have real estate sink into the doldrums while other sectors are booming.

This is not diversifying within an asset class.

But with diversification, if one of your assets takes a nosedive, you have many alternate assets to fall back on.

If you diversify smartly, the losses in the non-performing investments will be easily absorbed in the gains of the better performing ones.

Your investment risks are minimised while your average rates of return are maximised.


However avoid over-diversification.

While you don't want to store all your eggs in one basket, you also don't want to scatter your eggs among so many baskets that you find it difficult to monitor your investments.

Furthermore when you are over-diversified, your investments start to counter-balance each other so that your rate of returns is actually diminishing.