Investments

REITs

Asked by David Lim

Updated 3w ago

What are some risks that I should think of when investing in REITs?

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Sandra Teo
Sandra Teo,
Level 6. Master
Answered on 01 Apr 2019

Hello!

Some risks would include interest rate risk, the use of short-term debt and lack of safety net.

REITs are required to distribute 90% of their income to enjoy tax exemption and as a result they are not able to build cash reserves and thus are highly dependent on debt for financing. This makes them susceptible to interest rate movements. For instance, an interest rate hike would causethe REIT's interest expense to increase thus decreasing the distributable income and negatively impacting the distribution yield of the REIT.

As REITs are unable to build cash reserves, REITs often issue rights or conduct private placement to raise equity. These rights offering could potentially dilute current investors' stake.

The borrowing of REITs tend to be short-term (less than 10 years to maturity). This requires REITs to constantly need to refinance their borrowings for long-term assets. There is a risk that the REIT would not be able to fund refinancing options when its short-term debt is due.

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Ernest Yeam Wee Leong
Ernest Yeam Wee Leong,
Level 4. Prodigy
Updated 3w ago

If you are talking about REITS and its risks, it means you are looking at the risk of stocks and also the risk of real estate investment.

For reits, there is

  • vacancy rate

  • weighted lease average expiry

  • cost of debts

  • tenant concentration risk,

  • country risk

  • geographical risk

  • industry risk

  • gearing risk

  • political risk

  • legal risk

if you are keen to read more about company reviews and finance, do check out my blog at http://justbeingernest.blogspot.com/

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David Lim
David Lim

02 Apr 2019

Wow what a long list! It's pretty comprehensive thank you
Zann Chua
Zann Chua,
Level 6. Master
Answered on 01 Apr 2019

Hello!

Some risks include;

1) Interest rate risk

There is the risk of interest rates when it comes to risk. With a higher interest rate, there is usually a fall in demand for REITs. Based on historical data, it has been found that REITs do not perform well when there is an increase in interest rate

2) Market risks

REITs are traded on the stock exchange hence making their prices subject to demand and supply conditions. Therefore, their prices are usually a reflection of the confidence that investors have in the econoomy.

3) Concentration risk

If a large portion of the REITs value is from one or a few properties, if something happens to one of it, your risk of loss would be much higher

Hope this helps!

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