Takeaways

  • REITs are safer in generating steady income from real estate investments than traditional real estate investments.
  • REITs have outperformed the stock markets on average since the 1970s.

What are Real Estate Investment Trusts (REITs):

Very simply, REITs are corporations that invest in real estate by raising money from shareholders, either by operating or financing income producing real estate. In essence, REITs operate like mutual funds except that they invest in real estate exclusively.

REITs can be broadly classified into these 3 categories:

  • Equity REITs: The most popular type of REIT, equity REIT focuses on purchasing, managing, and developing properties such as offices, residential complexes, retail development, hospitals, hotels and resorts, with the main source of revenue being rental income.
  • Mortgage REITs: Primarily earning revenue by lending money to real estate investors or buying existing mortgage loans on property with the intention to collect interest is how mREITs operate.
  • Hybrid REITs: hREITs diversify, both by owning properties to generate rent income and issuing loans to real estate investors.

Public and Private REITs:

Public REITs are registered and traded in a stock exchange and can be easily bought and sold, however, the share prices are heavily influenced by market conditions and not necessarily the inherent value of the properties the REITs invest into. Furthermore, lack of long-term holding requirement restricts the implementation of long-term strategies.

Private REITs are not impacted by market volatility which reduces the risk on investors by diversifying their portfolio outside the stock market. The inherently long-term holding period of private REITs enables long term strategy implementations which help private REITs produce consistent higher returns over the long term.

Why REITs:

Diversification

REITs often own more than one real estate asset. By investing a fraction of the cost of a single real estate development, the investor can be a part owner of a firm that operates all the real estate developments under its portfolio.

Liquidity

REITs trade like stock. It can be bought and sold like stock in the stock market. This adds to the liquidity in the market. Direct investment in the real estate is illiquid and buying or selling of the development is very difficult, especially in a weak market.

Transparency

REITs are required to file financial reports, audited by professionals. Companies which offer REITs have a proven track record with several years of industry experience and are backed by adequate capital.

Steady Income By Dividends

Cash dividends are given to the investors from the income generated by real estate assets (Rental income, interests on debt). As the dividends are tied to risk adjusted, contractual cash flows, REITs provide stable, recurring dividends every year.

REITs have outperformed the S&P 500 since 1972. S&P 500 has an average annual return of  12.1% over REITs having a steady annual return of 13.3% according to this survey.

What you should know before:

Market Linked Risks

REIT share prices can drop as property values fall. Since REITs are tradable like a stock, share prices can fall with the broader stock market based on supply and demand of its shares. It is much more volatile than the inherent market value of properties.

Tax Benefits

Dividends earned from REITs are subject to taxation.

Low growth prospect

The prospect of capital appreciation is quite low in the case of REITs. As much as 90% of their earnings are returned to the investors and the remainder 10% is only reinvested into their venture.

How to invest in private REITs:

In Singapore, private REITs have traditionally been available to institutional investors and ultra-high net worth individuals at an investment size of S$250,000 and above. However, ADDX is democratising private REIT investing by making them available to investors for as little as S$10,000 (for primary offerings) or S$100 (to trade on our secondary market).

To qualify as an ADDX investor, investors need to meet one or more of the following conditions:

•Yearly income of at least S$300,000, or

•Net financial assets of at least S$1,000,000, or

•Net total assets of at least S$2,000,000

Bottomline

Overall, the advantages of investing in REITs still outweigh its disadvantages. REITs have outperformed the stock market consistently over the long term

ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.