Real estate investment trusts (Reits) are considered one of the most accessible means of gaining exposure in the Singapore real estate market.
“Young investors, who are constrained in capital, and yet would like to invest in real estate, could consider Reits as an alternative investment option,” said Deng Yongheng, Director of the Institute of Real Estate Studies (IRES), NUS and finance professor at the NUS Business School.
Prof Deng described Reits as “hybrid instruments that combine the features of real estate, stocks and bonds.”
Reits are basically collective investment schemes, where individuals can invest by purchasing units — mostly similar to shares of a common stock.
Normally, Reits raise money from unit holders through an initial public offering (IPO), which is then used by the firm to buy property assets such as offices, shopping malls, serviced apartments and hotels. The revenue generated from these assets are distributed at regular intervals to unit-holders.
Reits can be attractive because they provide low-transaction costs and enable investors to gain from property asset price appreciation, without managing or owning actual property.
Investors, however, are exposed to risks of liquidity and stock market volatility of investing in public-listed vehicles.
Prof Deng believes that Reits are subject to real estate demand-supply dynamics through their portfolios on one side, while their prices are affected by stock market trading sentiment and activities on the other.
Another benefit of Reits is diversification. Prof Deng noted that Reits have low correlation with other asset classes, like bonds and equity, as well as broad market portfolios.
He added that the “bond-like feature” of the Reits stems from dividends, which are typically paid out quarterly. Reits are mandated to distribute no less than 90 percent of their net earnings back to investors as dividends.
Source : PropertyGuru – 8 Aug 2011