REIT vs direct real estate investment

PROPERTY

INVESTING in real estate can be tricky.

For a start, those who intend to make a quick buck by “flipping” property within a few months will find that it is risky, especially in a property market less buoyant than in Hong Kong or Singapore.

The alternative is hard work, that is, managing residential properties (and absorbing all the hidden costs that come along with it) as long term investments, receiving rent and selling them off for a capital gain or profit.

Another factor that may deter investors from real estate is the difficulty in raising enough capital to purchase a particular property.

So, should you consider putting your money in a real estate investment trust (REIT) instead?

Granted, a REIT does not comprise residential property, but if it is profit you are interested in, it may be an option.

REITs originated in the United States in the 1960s, but it wasn’t until 2005 that Axis REIT became the first property trust to be listed on Bursa Malaysia.

In Malaysia, there are now 14 REITs to choose from on the Main Market, offering investors a choice to own stakes in commercial, industrial, plantation and office real estate.

Aside from being more liquid than investing in real estate, one of the reasons why REITs are more appealing than investing in actual real estate is because of its high yield.

Gross dividend yield in the FTSE Bursa Malaysia index is about 2.9%, while the average yield for a REIT in Malaysia is about 8%.

REITs yield higher returns because commercial real estate generates a huge amount of cash flow from rentals.

If one invests in real estate though, it may be hard to charge the most preferred rental rate, even if the property had been purchased for a hefty price, simply due to market forces.

As for REIT prices on the stock market, they generally tend to be “low risk” because their prices are sustained by the yield factor, hence the volatility element is reduced.

Even so, REITs are not immune to economic difficulties.

REITs such as AmFirst, Hektar, UOA and Axis hit their lowest point in the middle of the financial crisis in 2008 but have since recovered to their pre-crisis prices, if not better.

Part of their recovery, says an analyst, is due to good management, good investor relations and a proven track record when it comes to acquisitions.

Still, one critic of REITs says it is probably more worthwhile to purchase stocks of established companies if they want to play safe.

Advocates of the property trust point to the fact that REITs are a different investment class altogether, choosing to view them as an investment that bridges the gap between a fixed deposit and the stock market.

One drawback of REITs is their inability to benefit from capital gain, unlike real estate.

But with REITs, returns may be secured with less risk which make them a nice way to take advantage of the big booms in the real estate market.

Investors can do without taking on the risk of mortgage payments, unscrupulous tenants and rising tax rates.

However, less risk obviously comes with less reward.

Good capital appreciation is still the main factor driving demand for landed residential properties.

Since 2008, there has been an annual compounded growth rate of 10% for capital appreciation in residential hotspots such as Petaling Jaya, Taman Tun Dr. Ismail and Mont Kiara.

A home can go up in value ten-fold given the right market conditions, which would give one a hefty sum of money right into his or her pocket - this won’t happen with any REIT.

Ultimately, for someone who wants to have more control of their assets and is willing to improve their value, investing in residential real estate can be a good choice.

For someone looking for passive real estate investment, with the added benefits of portfolio diversification and liquidity, a REIT is a good option to consider.

Think of them as allowing investors to be exposed to the real estate market without having to fork out as much capital.

Alternatively, REITs could be purchased as part of a balanced portfolio, until one has enough capital to enter the real estate market.

By ANDREW LEE