Just like how we select our Mr/Mrs Right based on criterias, investors should be savvy on how to pick their REITs.
Real Estate Investment Trust, also known as REITs, are listed companies on the stock market. These companies own, operate and finance income-producing properties.
An investor buying into REITs would be akin to being a partial owner of a group of properties. The advantage of this would be being a landlord without the fuss of operating and managing the property!
Source: Make a Meme
Most REITs lease space/floor area and collect rental income, which are then distributed as dividends to investors. Think of the mainstream developers and famous shopping malls here in Singapore; most of these properties are part of the REITs listed on SGX right here in Singapore.
Some names may be very familiar to you, for example - the heartland malls (think Northpoint City, Causeway Point, White Sands..) owned by Frasers.
Picture how publicly listed companies in the stock exchange use investor’s money to conduct their business, REITs are similar in this regard and the money is used to buy, operate, and manage properties. Investors earn money when these properties pay out dividends or when they sell their stake for capital appreciation.
It is key to go for a reputable REIT manager who has a consistent track record. It is not wise to only depend heavily on just a few factors like yield. Take the time to understand other factors such as, market capitalization, management team, sector, and tenant lease.
Market cap - market capitalization refers to the total dollar market value of a company's outstanding shares of stock. Commonly referred to as "market cap," it is calculated by multiplying the total number of a company's outstanding shares by the current market price of one share.
Management team – looking beyond the stock price, management is a key quality for any business. All employees are important but, management is responsible for strategic decisions. Theoretically, management is also responsible to the shareholders. Good track records of performance and integrity are essential.
Tenant leases – these reflect the occupancy rates of the properties. Ideally, it should be as close to 100% as possible. Next, a history of rental increases would be promising.
Sector - Most REITs focus on a particular property type, but some hold multiple types of properties in their portfolios. Read the prospectus and understand them! For example, some office REITs focus on specific types of markets, such as central business districts or suburban areas.
Liquidity – readily traded on major stock exchanges, different from trying to buy /sell physical property
Diversification – access to real estate market as compared to buying and managing property on your own
Transparency – subjected to more layers of review from analysts, auditors, and independent directors
Dividends – steady stream of income over a regular period
Like all asset classes, REITs also possess their own set of advantages and disadvantages. A prudent way to would be to do your due diligence as well as to weigh the decision to buy or not based on your individual risk tolerance and investing goals.
This is a introductory opinion for potential investors interested to know more about REITs in general. Some further tips would be to continue accumulate your knowledge through reading, watching videos and community sharing with friends or on the Seedly platform.
I've linked some Seedly articles which may be of interest and further reading below: