What is a Real Estate Investment Trust (REIT)?
When you invest in a Real Estate Investment Trust (REIT), your funds are combined with those of other investors in a collective investment plan that invests in a portfolio of income-generating real estate assets such as retail malls, offices, hotels, or serviced apartments.
These assets are professionally managed, and earnings generated by assets (mainly rental income) are generally transferred to REIT holders at regular intervals after costs such as REIT management fees and property management fees have been deducted.
How does REIT work?
Through an initial public offering (IPO), money is obtained from unit holders and utilised by the REIT to buy a pool of real estate holdings. Tenants are subsequently assigned to these properties. In exchange, the revenue is distributed to the unit holders (investors) (which are similar to dividends).
Advantages and Disadvantages of Real Estate Investment Trust (REIT)
Advantages
- Diversification: Reducing the risk associated with investing in a single property by investing in a pool of properties through a REIT.
- Affordability: As an individual investor, you may be unable to afford a direct investment in a significant asset such as an office building or a retail mall. You may invest in these considerable assets in bite-sized bits by investing in a REIT.
- Tax advantages: REITs that transfer at least 90% of their taxable income each year benefit from IRAS’s tax transparency approach (subject to certain conditions). Individual investors who receive these payouts are likewise tax-exempted.
Disadvantages
- Market danger: REITs are traded on the stock exchange, and their prices are determined by demand and supply.
- Income danger: Distributions are not guaranteed and are affected by changes in the REIT’s earnings. For example, a REIT’s rental income may be impacted if tenancy agreements are extended at a lower rental rate than previously announced if the occupancy rate falls.
- Risk of liquidity: It may be difficult for a REIT to locate buyers and sellers for its assets. Under unfavourable economic conditions or unique circumstances, REITs may find it difficult to change their investment portfolio or sell assets on short notice.
