Friday, June 25, 2010

REITs vs Properties

For REIT investors, coming weeks are going to exciting with two largest REIT to date to be listed, Sunway REIT (July 8th) and the hot and juicy CapitaMalls Malaysia Trust (July 16th). I am still reading Sunway REIT prospectus - partly because somehow it got removed from Bursa website. Anyhow I only manage to download the first 80 pages but I guess it should be informative enough. Or if some of you have, would you mind to send it to me?

I am not really interested in REIT what more an IPO of REIT previously because I thought most of them aren't really great properties. They are good but aren't great. Sometimes I can't help but feel that REITs are the dump site for bad properties for developers. But of course not all of them does that. With the listing of Sunway REIT and CapitaMalls Malaysia Trust, finally we have something exciting in our REIT market. I won't go to much into details into both of these REITs. Sunway REIT star property is of course its Sunway Pyramid Shopping Mall while CapitaMalls Malaysia Trust's is non other than "Kam Ho" @ "Golden River", Sungai Wang Plaza which is located in the Golden Triangle itself. Probably we could see less people complaining about the traffic or problem finding parking space for these 2 malls. I really like shopping malls because I think these are the more "stable" investment. Offices come second. I keep my finger cross to wait for MidValley Megamall and KLCC to be listed.

So, what is REIT?
As far as I know, REIT is almost like a trust fund but instead of owning equities, bonds and other unit trusts, it owns only properties. But unlike property developers or investors who normally buy and sell properties for capital gain, REIT properties are those which meant for rental income. Of course the fund could still sell the properties like what Starhill REIT does, but primarily it is meant for rental income. So REIT is an income fund.

REITs vs Direct Properties Investment
If one were to rent out a property take a shop lot for example, he/she would have to buy the entire lot in order to rent it out for rental income. So the person will have to either has lots of cash, lots of friends to share or borrow money from bank to finance such investment. But for REIT, you won't have to do that because in a way you could own that small pieces of the lot which is readily shared by at least 500 other investors.

According to ECM Libra research dated 21st June 2010 (so pretty recent), the average existing M-REITs yield is about 8.7%  meaning if you buy each and every REITs with the same number of units, you'll get 8.7% dividend in return. So let's do some comparison. If you purchase a RM300k condo units by cash, likely you'll able to rent it out for about RM1100 per month (Penang market) so roughly you'll get about RM13200 annually which will give you about 4.4% yield excluding tax. This would make REIT a more attractive investment because if the yield is 8.7% this would mean you'll get RM26700 annually if you invested RM300K. That is twice as much as you get from your condo. Plus instead of owning a unit of some condo in Relau, Penang  you'll be getting a piece of Sungai Wang, Gurney Plaza and The Mines.

Okay some say, yea I can get loan from bank and all I need is to pay 10%-20% down payment and I'll get better deal. - Or is it? Don't forget you have installment to pay. Let's say the same condo and you pay 10% as down payment. To keep things simple we assume BLR rate of 6.05% from Hong Leong (don't worry about the variable rate because it actually comes back to the same thing. Banks are not stupid) and assume your loan repayment period is 30 years. Your estimated monthly loan installment would be about RM1600. That's negative cash flow of RM500 per month. If you pay 20%, you'll a negative cash flow of RM300 per month. If you invest RM30K in REIT, you'll get RM217.50 monthly but of course you could only cash the money quarterly or twice per year through dividend. One might argue, you'll able to raise your rental. But so as REIT. One might also argue if you'll able to get the rental income nett after you settle your loan. To keep things simple, assume reinvest your your dividend into your REIT annually and I bring down the yield say about 6% average over the next 30 years. Initially with RM30K you get RM2670 per year. If you compound 6% annually to the next 30 years, you'll probably get about RM14k annually in dividend which is about RM1200 in rental monthly. Alright that number may not be huge 30 years later due to inflation but hey, think about this, your REIT manager owns that piece of properties as well. Don't you think he might not want his income to be eroded by inflation? Don't you think he wants to beat the inflation? Also, that 6% is calculated by assuming your REIT's properties value and market value stayed the same over the next 30 years which logically not possible. Also, that is calculated by compounding it annually. For some REIT, you are getting your dividend every quarter or twice per year, so it actually compounds quarterly or half-yearly. And, you are not tied to any debt. You buy with what you have.

For REIT, you might also get capital gain just like the actual property itself. So you get capital gain plus income. Plus, there is NO CAPITAL GAIN TAX when you sell your REIT. Okay, REIT is listed on the stock market, so it is "efficient" - or is it? Yea, it does fluctuates a lot if you were to compare it to property price. It is listed in the market so it is easier for investors to put in their money and out, definitely they'll be element of emotions there. Probably I can say REIT prices are more emotional than the actual property ones. But historically it is really not that "efficient" if you compare it to business equities. Speaking about that, investor could own a piece of property easily through REIT because all you need to do to purchase is like buying a stock through your broker. Forget about the lawyer fees, S&P...etc. There are all taken care of. All you need to do is to research the REIT and its manager just like stock investment. Also, instead of managing the property yourself, you could have a manager who owns a portion of that property to manage it for you. This manager is likely to be the previous owner of that entire property, so you could have some historical performance check.

Is it the best time to buy REIT now?
If you ask me, price-wise I would say yes, why not. But for me, I would still want to look at some other factors which is why I still haven't make any decision on any of them. For some reason which I yet to find out, M-REITs are selling below their book value. Meaning there is someone willing to sell his house which is worth RM300K for maybe about RM240K. So the price is good. 

Personally if you ask me to pick between REIT and the actual property, I would choose REIT unless you like to own the whole piece. That's me.

This comment is based on my personal thoughts, opinions and my risk tolerance. It should not be considered as an investment advise. Please consult your financial advisor or do some research of your own before making any decision. You might have your own thoughts. I would love to here from you. You can always place your comments here and or email me privately at 


Anonymous said...

Dear Luzeeker,

All the time, I never trust much in Malaysian property counters, like BCorp, YTL and Sunway. These companies own so many great properties, however they performed badly in share market over the years.

Many years ago, I realized that the biggest income yield from the property sector is actually rental income derived from retail shops. Nowadays to own a good retail shop is extremely expensive and takes long procedure.

The REIT concept is very good as it incorporate Unit Trust concept into Real Estate sector. Moreover, it is transparent and effective. Unlike those giant property counters, the public have problem knowing how they make money out of every single property/asset.

Thank you for sharing my views.

Katie said...

I agree that investing in a REIT is better than investing in a property on its own. You mentioned that if you did get property that someone could manage it for you, but if you can't find someone to manage the property then you become the landlord who has to fix the toilets. So yes investing in a REIT is much more appealing than fixing toilets.
Also you mentioned the flux in the market and how that can affect REITs. There are non-traded REITs that make for good investments as well. Something like a Cole REIT would be a great option, plus they have a diversified portfolio. Cole has investments in retail, office and industrial real estate.

Marie said...

I second Katie's thought! I also like her idea about investing in a Cole REIT, a non-traded REIT seems very appealing.