Want to invest in real estate but the process and cost just seem too intimidating?
You’re not alone.
Thankfully there’s a much simpler way to tap into the world of real estate investment without having to buy the entire property, manage tenants or leaky pipes.
Real Estate Investment Trusts (REITs) might be just what you need.
You invest by purchasing units of a company that owns and manages multiple income-generating properties instead of buying an entire building yourself.
Invested funds are used to acquire and maintain these income-generating properties.
A portion of the rental income collected will be given to you as dividends based on the number of units you own in the company.
High Liquidity
Compared to direct property ownership, REITs can be bought and sold with greater flexibility and accessibility as they are traded on stock exchanges.
With a low barrier to entry, where as little as a hundred Singapore dollars can be invested, REITs make a practical option for both beginner and seasoned investors.
Attractive Dividend Yield, Stable Income Generation
According to the Monetary Authority of Singapore (MAS), in order for REITs to qualify for tax transparency, they are required to pay out at least 90% of their net income annually to unitholders in the form of distributions.
MAS also implemented a single leverage limit of 50% to prevent REITs from taking excessive debt to build their portfolio.
These regulations not only encourage financial discipline but also protect investors even in times of economic downturn.
Since the income for REITs are mainly derived from rental payments which increase with inflation, they are able to consistently generate income regardless of the market condition.
This built-in inflation protection supports consistent dividend payouts and maintains cash flow.
For the past few years, REITs have continuously outperformed the Straits Times Index (STI), on the basis of the Total Return Index (TRI).
The metric takes dividends and price appreciation into account while assessing an asset’s overall performance.
While the STI includes a few cyclical businesses which are sensitive to economic changes, REITs benefit from stable income and rental growth, giving them an edge in performance.
Diversification
REITs are also an effective tool for diversification because they invest in various sectors of the economy.
From specialised properties such as data centres to more traditional REITs like healthcare and industrial.
For example, one of Asia’s largest listed healthcare REITs by asset size, Parkway Life REIT (SGX: C2PU), also known as PLife.
PLife generates stable income from hospitals in Singapore and nursing homes in Japan and France.
Another recognisable local REIT is Fraser Centrepoint Trust (SGX: J69U), or FCT, known as Singapore’s largest suburban retail mall owner.
FCT benefits from the stable foot traffic and income from its nine malls located in residential catchment areas offering essential services.
Due to the relatively low correlation between real estate and equities, they tend to react differently to market conditions.
Having REITs in a portfolio will provide valuable diversification, reducing overall volatility and enhancing the portfolio’s long-term stability.
Professional Management
REITs are also managed by experienced professionals who handle all aspects of property ownership, from financing to leasing and maintenance.
Their goal is to increase property value and maximise rental income for investors.
Investors are able to benefit from real estate ownership without having to deal with tenants or maintenance issues.
Get Smart: The Best of Both Worlds
REITs offer a solid combination of capital appreciation similar to equities and steady income like bonds.
Their strong long-term performance, high dividend yield and ability to keep up with inflation make them essential for those who want to create a stable and well-diversified portfolio.
They can provide you with a compelling way to grow your wealth and build a stream of passive income, regardless of where you’re in your investment journey.
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Disclosure: Charlyn Tan does not own shares in any of the companies mentioned.
