“Ninety percent of all Millionaires become so through owning real estate” -Andrew Carnegie
Although we don’t realise it, real estate is part of our lives since the day we are born. We come into this world under the shelter of a hospital and then are taken home. We go to school for the large part of our youth and then on to college/university. Then we start working and we have to operate out of an office or work in a factory. It doesn’t stop here. After we get married, we take holidays and get pampered in a hotel or a resort having travelled from airports or train stations. We also shop in malls or high street shops, see our favourite football games in stadiums and then as we come to the end of our lives, we lie to rest in a memorial park.
Yes indeed, we are surrounded by property all our lives, and it’s no wonder that this is a favourite investment tool amongst us Asians.
Let’s look at some of the main reasons for owning real estate;
• Buy and sell for fast speculative profits
• For long-term investment income and capital appreciation
• To hedge our capital against inflation
• To let the word know how wealthy we are
• To leave an inheritance for our children
• To have a permanent abode that is ours
For many years, the only way private investors could own property was to buy into Houses, Shop lots, Office suites, Condominiums or Serviced Apartments. Many investors faced problems obtaining a bank loan, disposing of the property quickly, being exposed to interest rate volatility, being taxed up to 25% on income and finding tenants who will pay a rent that justified the investment.
Until 2005, this was the only real estate investment choice available in Malaysia but the landscape has since changed by having an alternative property investment tool – and that is a REIT.
WHAT IS A REIT?
A Real Estate Investment Trust (or REIT) is a listed vehicle that invests in a portfolio of income-generating properties. Rents collected from tenants are distributed on a regular basis to provide stable yields to Investors or Unitholders.
This distributed income to Unitholders is subjected to a one-time withholding tax of 10% for individuals. The REIT is not taxed by the Internal Revenue Board (IRB).
Listed REITs are traded on our local Bourse and provide Unitholders with consistent returns in the form of income distributions and capital gains. REIT’s in Asia Pacific evolved from the listed property trust structure introduced in Australia of the 1970’s.
Malaysia is the first country in Asia after Australia to introduce listed property trusts to encourage small investors to invest in the local property sector. In 1989, the Amanah Harta Tanah PNB debuted on Bursa Malaysia as the first listed property trust in Malaysia, with the Amanah Harta Tanah PNB 2 and Arab Malaysian First Property Trust after it. However, these three listed property trusts did not manage to garner much investor interest due to restrictive rules and low growth.
The earliest markets to embrace REITs as an asset class was Japan in 2000, followed quickly by Korea in 2001, Singapore in 2002, Hong Kong and Taiwan in 2003 and in 2005, the Malaysian Securities Commission announced the Malaysian REIT Guidelines which resulted in the listing of Axis -REIT and Starhill REIT that same year.
The Malaysian REIT market has seen tremendous achievements over the last ten years. Today we have a total of 15 REITs with a total market capitalisation of RM38 billion and a total asset size of RM49 billion.
WHAT MAKES A REIT SO DIFFERENT FROM OTHER ASSET CLASSES?
Typically REITs invest in the many asset classes – office, retail, hotels, hospitals, and industrial, logistics, shopping malls, hospitals, colleges and business parks. Some REITs specialise in one type of asset class while others offer a mixed portfolio. The invested real estate provides steady income generated from rent under lease contracts and potential capital growth.
REITs are not allowed to enter into development projects which can put the trusts income at risk.
In the simplest form, a REIT provides the property investor with an opportunity to own property of a very high standard through a securitised structure where one can own an interest in a portfolio or dispose it in an instant to realise profit.
WHAT MAKES REITS GOOD INVESTMENT CHOICES?
1. It’s professionally run and managed
A REIT is run by a professional management company (The REIT Manager) which is licensed by the Securities Commission under the Capital Market Services Act. Strict compliance to the Securities Commission and Bursa Securities’s regulations is mandatory.
The REIT Manager is responsible for asset maintenance, ensuring property vacancies are kept at a minimum, prompt rental collection, dividend payments, prudent capital management of the Trust and take on asset enhancements when needed. Most importantly, the REIT Manager is there to ensure that the tenants are happy and their needs are being attended to on a daily basis. This in fact is a big plus point for all property investors. It eliminates business risk for the investor.
In addition many REITs recognise the importance of best practices and good corporate governance which is important to promoting investor confidence. A good example here is that of Axis-REIT winning the Asia Pacific Real Estate Association’s (APREA) Best Practices Award, three years running.
So, in summary, investing in a REIT will be your answer to owning real estate without the hassle of attending to your tenants’ demands or managing the property.
2. There are many investment options to choose from With fifteen REITs currently listed on Bursa Securities, investors have options to choose the type of REIT to invest in The Malaysian REITs and their assets classes are listed below:
|
REIT Name |
Type of investment |
|
Al Aqar REIT |
Hospital |
|
Am First REIT |
Office, retail and hotel |
|
Amanahraya REIT |
Industrial, office, hotel, educational institution and retail mall |
|
Atrium REIT |
Industrial |
|
Axis-REIT |
Office and industrial |
|
CMMT REIT |
Retail |
|
Hektar REIT |
Retail |
|
IGB REIT |
Retail |
|
KLCC REIT |
Office and retail |
|
Pavilion REIT |
Retail |
|
QCT REIT |
Commercial properties |
|
Sunway REIT |
Retail, hotel and office |
|
Tower REIT |
Office |
|
UOA REIT |
Office |
|
YTL REIT |
Hotel |
3. Small start-up investment needed
REITs are unlike any physical real estate investment that REITs are unlike any physical real estate investment that requires a big initial investment outlay. With a REIT, investors can purchase a partial ownership of a big portfolio of high quality real estate and enjoy the income produced from it as well as its appreciation in value. As these are Trusts, have high quality, well-maintained and sometimes iconic properties, their value are always moving up. Through REITs, investors can lay claim to ownership of such assets like the KLCC twin towers, Pavilion, Sunway Pyramid and the Midvalley shopping malls – properties that would be out of reach of the man on the street before. The minimum subscription a unitholder can invest in a REIT is 100 units and that means for a very small outlay one can get started.
4. It’s easy to buy and sell REIT units
As all REIT units are listed on Bursa Securities they trade like normal equity stocks. They are priced daily and the prices are transparent. Unlike buying a property which may take more than six months to complete and involves an agency commission; the buying and selling of REIT units can be done almost instantly and is much cheaper to transact.
5. Frequency of your REIT dividend payment
Most of the REITs pay a quarterly dividend, which is as good as collecting monthly rents from tenants from a directly-owned property investment.
6. There is a distinct tax advantage
The tax advantage is the one of the key attractions of investing in REITs. For a REIT that distributes at least 90 percent of their total yearly income to unit holders, the REIT itself is eligible for exemption from the corporate tax rate of 25% under Section 61A of the Income Tax Act 1967 for that year of assessment. However, the withholding tax would be applicable on REIT’s dividends that have been exempted at the REIT level, the schedule of which is appended below;
|
Unitholder Class |
Withholding Tax Rate |
|
Resident corporate |
Nil^ |
|
Resident non-corporate |
10% |
|
Non-resident individual |
10% |
|
Non-resident corporate |
25% |
|
Non-resident institutional |
10% |
^ Resident corporate investor will enjoy tax transparency but will subject to the prevailing corporate tax rate when it is declared as income
The 10% withholding tax rate is considered low and competitive as compared to a direct property investment where the rental is taxable at the progressive individual rate to a maximum of 25%.
7. REITs sometimes trade their assets like that of a normal property investor
Some REITs occasionally behave like an individual property investor and choose to dispose of an asset when the time and price is right. Axis-REIT is one such example. In the last ten years it has completed the disposal of three assets, the gains of which were fully distributed back to investors as special tax free dividends, much to the delight of the unitholders.
8. REITs – a hedge against inflation
Investment in a REIT should always be viewed as similar to a direct property investment i.e. it is a long-term investment and is 100% asset-backed. If you look at the value of property as always increasing and the value of money always decreasing over time, it does not make sense to leave your money in the bank to earn the paltry 3-4% interest offered in a fixed deposit. At the end of the year your dollar will probably buy you 5-10% less goods and services depending on inflation. It’s a negative return.
A REIT provides both a cash dividend return every quarter as well as a capital gain if the REIT is well-run and successful. For example for 2014, Axis-REIT provided investors with a total annual return of 30%!
It will always provide the investor an excellent hedge against inflation and a safeguard of your investment.
–PROPERTY INSIGHT