Benefits of Investing in REITs

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Benefits of Investing in REITs

Although REITs are already there in USA for around 50 years, they haven’t surface in Singapore until recently. Meanwhile, people frustrated of their hard-earned savings being eroded by inflation has only the few usual investments to choose from: stocks, mutual funds, fixed deposit.

REITs emerged as an excellent alternative and have attracted many layman investors (many ladies) due to its advantages which I will go through here…

1.   

         High Yield

For many investors, the main attraction of REITs is their dividend yield. The average 6% p.a. returns notably run down savings and fixed deposits rates of below 1%!

Also, REIT dividends are secured by stable rents from long-term leases, and many REIT managers employ conservative leverage on the balance sheet.

2.    Double Tax Avoidance

REITs are exempt from taxes at the corporate level because of their legal structure as they agree to give 90% of their profits to investors.

Uniquely in Singapore, there is also no tax at the personal level for either dividends collected or capital gains when you sell the REITs!

Double taxation avoided leads to lower costs and allow more of your money to compound!

3.    Liquidity

Remember that a REIT combines qualities of real estate and stock? One major advantage a REIT has over real estate is that REITs are liquid on SGX.

Unlike real estate directly held by the investor, REITs are a liquid asset that can be sold fairly quickly to raise cash or take advantage of other investment opportunities.

4.    Diversification

Using REITs, investors with only a few thousand dollars available can diversify their holdings between various geographic areas and property specializations, depending on the REIT’s portfolio.

In the case of direct property ownership, this would not be financial feasible unless the investor took on excessive leverage or business partners.

Thus, a greater amount of diversification is generated as the trust companies are able to buy numerous properties and reduce the negative effects of problems with a single asset.

In short, investors are able to reap benefits of a diversified property portfolio for a small investment.

5.    Professional Management

A professional, dedicated management team responsible for the day-to-day operation of the business is able to provide the investor with expertise beyond his or her own knowledge base.

This is very important as they can also increase distribution through clever management strategies [e.g. draw in anchor tenants, renovating property for a fresh look, hosting events and promotions] which a single investor is fairly limited to.

Lastly, as the REIT manager would handle many properties concurrently, there are economies of scale to be harvested in the process.

6.    Easy Due Diligence

The best part about most REITs in Singapore is that it is easy to conduct due diligence (treat it as detective work, exciting yeah?!) on the REIT.

If you are looking at retail malls REIT, you can pay a visit to the malls to check out the crowd and gauge whether tenants are profitable. (profitable tenants = profitable REIT = $$$ for investors!)

If it is an office, you can easily view the condition and general maintenance of the building, its level of security, how conducive it is for tenants and how many vacancies there are in the building.

A short interview with the tenants may reveal to you their stance towards the management and the building.


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