10 Myths About REITs And Why You Should Ignore Them

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Prudence Hudson
5 years ago
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10 s About REITs And Why You Should Ignore Them How

Many people have made their fortunes from property

In fact, it is easier today than it was decades ago.

and even telecommunications towers from the comfort

1 10 s About REITs And Why You Should Ignore Them How To Become A Virtual Landlord Without The Hassle Many people have made their fortunes from property and it may not be too late for us to do the same. In fact, it is easier today than it was decades ago. We can now buy many property shares on the stock market. So we can own offices, hotels, factories, hospitals and even telecommunications towers from the comfort of our homes. This myth-busting report will show you how. By David Kuo, CEO Motley Fool Singapore 1

Perhaps it is because many investors expect them to be far more complicated than they really are.

2 If I had a dollar every time someone asked me about REITs, I would be a very rich man. It seems that even though Real Estate Investment Trusts have been around for decades, they are still some of the least understood investments in the stock market. Why? Perhaps it is because many investors expect them to be far more complicated than they really are. Even though they are shares, and they are listed on the stock market, they do not always behave in the same way that shares do. It is almost as though they are a stock-market anomaly. Additionally, I believe they cannot really be valued in the same way that many shares are rated. For instance, if we look at how much we are paying for every dollar of profit that REITs make, then they can look outrageously expensive. So, it is understandable why some investors might want to give them a wide berth. But that could be a mistake. Once you understand REITs and put some of the myths about them to the back of your mind, then you could be in for a long-term treat. REITs could be the shares that keep on giving. So here are 10 myths about REITs that we really need to consign to the bin. #1 Space is unlimited There is some truth to this. For instance, Orchard Road in the 1960s was lined on both sides by twostorey high shophouses. But today, those quaint Peranakan buildings have been largely replaced by skyscrapers and gigantic shopping malls. It is quite possible that, one day, those tall buildings could be replaced by even higher constructions. So, available space could be limited only by the imagination of architects and the ingenuity of engineers. But here is the thing, there is still only one Orchard Road. It is as much a destination of choice for shoppers today as it was more than five decades ago. So the thing we need to remember is that there is no substitute for a prime location. Prime locations will always be in demand, be it Orchard Road in Singapore, Nathan Road in Hong Kong or Oxford Street in London. 2 If you are a landlord, you will always want to choose a location where shoppers go. So, while available space could technically be an unlimited resource, land is a scare resource.

#3 Physical property is better There is a certain attraction when we tell friends and family that we own a condo or two in a salubrious part of town for rental purposes.

3 #3 Physical property is better There is a certain attraction when we tell friends and family that we own a condo or two in a salubrious part of town for rental purposes. But being a landlord is not all that it is cracked up to be. It can be a lot of hard work. #2 The taxman always wants his cut No, no, no. It is true that businesses have a responsibility to pay corporation tax. Failing to do so could incur the wrath of the taxman. It is also undeniable that individuals have to pay income tax. But REITs are an exception to the rule. Provided a REIT pays out at least 90% of its distributable income, it is exempt from corporation tax. And here in Singapore, we do not pay taxes on dividends, provided we are a private investor, filing taxes as an individual, rather than investing through a business. So, if you are a REITs investor, it can be a win-win situation. The REIT that you invest in does not have to pay income tax, and the investor in the REIT is not required to report any dividend income to the taxman, either. So, where is the catch? There is no catch. Property development is expensive. Consequently, governments want to actively encourage property developers to And if you should ever want to call it a day, it could take ages to find someone who is willing to take the property off your hands. It could take weeks, months, if not years to find a buyer. On top of that, buying and selling property can be quite an involved process. Before you can get your hands on a property, estate agents, bankers and solicitors are involved along the way. But it only takes the click of a mouse to buy and sell a portfolio of REITs. So, it can take just a few minutes to buy a wide range of property assets. And selling a REIT could not be any easier. If you sell your REITs in the morning, the money could be in your bank brokerage account after two days. Job done. The REIT that you invest in doesn t have to pay income tax, and if they file taxes as an individual, the REIT investor is not required to report any dividend income to the taxman either. 3

Every trading day, millions of shares in REITs are traded. So, it should not be too difficult for orders to buy and sell to be filled.

4 #4 It s hard to buy and sell REITs That might have been true before Singapore reduced the lot size from 1,000 shares to 100 shares. But even then, Singapore REITs are generally priced between $1 and $2. So, they should be relatively affordable. Additionally, the REITs market is currently very liquid. Every trading day, millions of shares in REITs are traded. So, it should not be too difficult for orders to buy and sell to be filled. There is something else to consider: You do not have to sell your entire REITs portfolio in one go. You can sell them piecemeal, if you like. If you need a small amount of money very quickly, you could sell just one or two lots. You cannot say that about property. I have yet to hear of someone selling a door or a window from their condo to raise a bit of cash. #5 It s hard work owning REITs It is much harder being a landlord than owning REITs. A REIT is run by a manager, whose job is to take care of the property. This includes maintaining the asset and ensuring that it is in a rentable state. A REITs manager has to make sure that vacancies are kept to a minimum. No tenants, means no rent. And low tenancy rates mean poor net property income, which translates to disappointing distributions for shareholders. But as a REITs investor, we can leave our worries at the doorstep and let the manager take the strain. What is more, REITs - unlike us - enjoy the benefit of economy of scale. Unless we have bags of cash at our disposal, we are probably limited to owning and renting out just one or two properties. Void periods can, therefore, be disproportionately painful. But collective ownership through REITs, could mean that we are part owners of thousands of square feet of lettable property. One or two empty offices are hardly going to hurt us much. 4

#7 Landlords collect monthly income, REITs investors don t #6 We are restricted to factories, malls and offices I have no idea where this myth came from.

Hospitality REITs include hotels and serviced apartments, while industrial REITs are exposed to flatted factories and industrial parks.

5 #7 Landlords collect monthly income, REITs investors don t #6 We are restricted to factories, malls and offices I have no idea where this myth came from. Perhaps it is because these are some of the most prevalent and some of the most high profile REITs that are available. But REITs come in all shapes and sizes. Hospitality REITs include hotels and serviced apartments, while industrial REITs are exposed to flatted factories and industrial parks. There are also hospital REITs, data-centre REITs and REITs that own telecommunications towers. Ok, I will let you have that one, but only grudgingly. Some REITs pay distributions every six months, while some pay them quarterly. But if you select your REITs with care, it could be possible to construct a portfolio that could generate distribution income almost monthly. It might not be the same amount every month - there could be more in some months and less in others. But here is something worth considering. Some REITs might let you take your distributions as shares rather than cash. It can be a great way to increase your stake in the property without whipping out your wallet. With more shares to your name, you could have more income next time around. This is the basis of compounding, in which more shares can result in more dividends, which could result in more shares, and so on. We can even buy shares in a company that rents out space atop its towers to telecom companies to attach transmission equipment. The upshot is that it is possible to build a diversified portfolio of REITs across various industries to help spread the risk. And there is more. We do not have to restrict ourselves to just one country. On the Singapore Exchange there are REITs with exposure to Europe, the US, Australia and Japan. So, we do not have to venture too far from our own backyard to get geographic diversification. Some are foreign companies that have chosen to list in Singapore, while some are home-grown businesses that have ventured to pastures new. 5

MOTLEY FOOL SINGAPORE 2018 #9 When interest rates rise, REITs fall REITs are seen by some investors as a proxy for bonds. So, they expect the price of REITs to fall if interest rates rise.

It might need the money to buy additional properties. It might have to pay down some loans. Both of those can be valid and good reasons for raising cash.

6 MOTLEY FOOL SINGAPORE 2018 #9 When interest rates rise, REITs fall REITs are seen by some investors as a proxy for bonds. So, they expect the price of REITs to fall if interest rates rise. But it could be wrong to jump to that conclusion. #8 Dilution is bad Occasionally a REIT may need to raise money from shareholders. That could be for a number of reasons. It might need the money to buy additional properties. It might have to pay down some loans. Both of those can be valid and good reasons for raising cash. Generally, the REIT will let existing shareholders buy more shares at a discounted price. The discounts can be quite generous. So, they could be worth taking up. But if you cannot afford to take up the offer of new shares, then it could mean receiving fewer dividends. rather than being damaging for REITs, interest rate hikes could even benefit them. 6 When interest rates rise, REITs, which rely heavily on borrowings could have to pay more interest on their loans. Additionally, investors have more choices about where to put their money to earn income. So, the price of REITs could fall. But let us not forget that central banks hike interest rates to dampen inflation as a result of increased economic activity. That could bode well for REITs. Increased economic activity could mean greater competition for available resources such as property. In turn, that could mean higher rents. So, rather than being damaging for REITs, interest rate hikes could even benefit them.

Here at The Motley Fool, we aim to tell the truth about investing.

7 Final Foolish Thoughts Stock-market myths can prevent us from reaching our long-term goals, if we let them interfere with the way we invest. And poorly-informed investors are as bad as half-baked electricians. They can potentially hurt themselves, as well as others around them too. Here at The Motley Fool, we aim to tell the truth about investing. By busting these 10 popular myths about REITs, we hope to give you the confidence to invest in these income-generating property assets. They can be the investment that keeps on giving. #10 REITs don t grow This is possibly the most common and most damaging myth about REITs. Generally, REITs are high yielding. So, it seems unlikely that they would be able to grow quickly. But the total return that shareholders enjoy comes in two parts, namely, through capital growth and reinvesting the dividends received. Over the last four years, the median total annual return for Singapore REITs was about 12%. That is not a poor return at all. It also underlines the importance of reinvesting dividends to get the most out of the stock market. However, it is important to judge each REIT on its own merits before we invest in it. Great REITs can lead to great investments - only if there is a clear path based on our investing thesis. So, we investors need to pick our REITs carefully. All information as of 16 May 2018, is provided exclusively by The Motley Fool Singapore Pte Ltd, a licensed investment advisory research provider (MAS Licence No. FA ). Any information, commentary, recommendations or statements of opinion provided here are for general information purposes only. It is not intended to be personalised investment advice or a solicitation for the purchase or sale of securities. Before purchasing any discussed securities, please be sure actions are in line with your investment objectives, financial situation and particular needs. International investors may be subject to additional risks arising from currency fluctuations and/ or local taxes or restrictions. The information contained in this publication are obtained from, or based upon publicly available sources that we believe to be reliable, but we make no warranty as to their accuracy or usefulness of the information provided, and accept no liability for losses incurred by readers using our research. Recommendations and opinions are subject to change without notice. Please remember that investments can go up and down, including the possibility a stock could lose all of its value. Past performance is not indicative of future results. Copyright 2018 The Motley Fool Singapore Pte. Ltd., All rights reserved. No part of this publication may be reproduced, stored, transmitted in any form of by any means without The Motley Fool s prior written consent. For more information, contact Member Support at: sgmembersupport@fool.sg 7

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