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03 - REIT - May 27
03 - REIT - May 27
03 - REIT - May 27
What is REIT?
Anyone wishing to get into real estate balks at the high capital outlay needed, such as
constructing a commercial building for example, just to get started.
After the building is up, recurring costs also pile up such as taxes, security, repairs, rent
collection, making sure vacancy is kept low, dealing with tenants, etc.
For this purpose, real estate investment trust or REIT allows the public to own shares of big
properties with minimum capital and without having to worry about managing the day-to-day
operations.
And now with the money pooled from the investors, the company can lease, manage,
purchase or sell real estate properties. Likewise, it may also need to hire an independent
property manager and a fund manager.
At any length, the property manager performs task related to the general upkeep of the
assets such as security, collecting rent, customer service for tenants, among other things.
On the other hand, the fund manager is responsible in making sure that the company’s
investment objectives are executed and met.
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DETAILS REIT MUTUAL FUND
Buy Purchase on the exchange Buy stocks from the mutual fund company
Sell Sell on the exchange Sell stocks to the mutual fund company
Advantages of REIT
But why would you want to invest in REIT? Here are the many benefits.
Minimum capital. It relieves the pressure in coming up with huge capital or resorting to debts
just to become part-owners of real estate. They are affordable.
Less hassle. No need to hire contractors and construction firms, etc. You would also not be
involved in managing the properties, so you are saved from overseeing repairs, looking for
tenants, providing security, paying for insurance, etc.
Dividends. Investors are entitled to 90% of the net income. There’s also the chance that this
goes up through hikes in rent and tariff/tolls, low vacancy rate, etc.
Value appreciation. The price of the stock may increase due to growing demand, increase in the
value of the lot, development of vicinity around the location, etc.
Assets are finished and already generating income.
Management. Expert managers oversee the company and its assets.
Diversification. The stocks contain mixture of projects.
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Disadvantages of REIT
Some companies may own only the buildings but not the land they stand on, which may deprive
shareholders the chance to ride on the increase of the land property value.
Real estate is cyclical. The market can experience hiccups such as high vacancy, and that can
mean lower revenue. WHAT ABOUT THE ADVERSE EFFECT OF COVID 19 NOW?
It is subject to tax hikes on properties imposed locally and nationally.
Slower growth compared to other equities as most of the income goes out to shareholders as
dividends rater than being reinvested back to the business to create more value.
Investment risks can include deteriorating property values, higher interest rate, debts, location,
unfavorable tax environment, etc.
Some REITs have high management fees and levels of debts.
They’re also susceptible to interest rate hikes. Investors buy treasury bonds and bills when
interest goes up, driving share prices of REITs down.
When done right, investing in REIT can be one way for the public to beat the effects of
inflation. In other words, it can also an affordable alternative in helping people grow their
wealth in the long term.
Of course, it may be suitable for investors who are looking for passive income. In fact,
dividends are paid out annually, and if the price of the stock is undervalued then it can be
attractive because you get higher yield.
To illustrate, yield is the amount of dividend over the stock price, so if the yield ₱10 and stock
price is ₱100 the yield is 10%. And the higher the dividend and the lower the stock price, the
better the yield becomes.
Nevertheless, it can also be good for long-term investing. Most of the income goes back to
investors. The company may likewise take time to grow (unless it borrows huge sums)
because it has less money in acquiring new assets.
Also, it can be an option for those who are looking to diversify their portfolio as it provides a
way of exposure to the real estate industry. Indeed, it can give recurring income on a long-
term basis.
What are the factors you need to consider before investing in REIT?
What are the things that you need to do before buying REIT shares?
First of all, the year 2020 is going to be the first time that the country will see new REITs being
offered in the market. So people are naturally going to wonder what the details that they
need to look out for when considering them as investment option.
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2. Do your due diligence
Perhaps the more important is to look into two things: the company and its assets. Indeed,
the company must have proven track record in the industry. More importantly, it has the
trust and made a reputation among peers.
This can be done by looking at their credibility. What past projects did they have? Were they
successful? Did they contribute to its success or failure?
One other way is to see how resilient they are in times of crisis. Are debts weighing them
down? How do they cope with the downturns in the market?
What have you heard about their expertise? Are they good property managers? Are their
buildings well taken care of? How do they do their job in terms of making sure occupancy is at
optimum?
You have to see the actual properties that form part of the asset of the company. Here’s a rough
guide to help you.
What basket of properties does the company have? You can search for information because
they are disclosed including details such as the name of hotels, condos, buildings, etc.
Are they in prime locations?
Are there future government projects in the surrounding area?
What is the quality of the construction?
How do these assets generate income?
What is the general outlook of the businesses that lease, rent or occupy the properties?
For commercial spaces, what is the vacancy rate and what kind of businesses are renting? Is
there good foot traffic if the tenants are malls and retail? If it’s a hotel, how is the level of
tourism activities?
What are the factors you need to consider before investing in REIT?
What are the things that you need to do before buying REIT shares?
First of all, the year 2020 is going to be the first time that the country will see new REITs
being offered in the market. So people are naturally going to wonder what the details that
they need to look out for when considering them as investment option.
Therefore, here are two things: check and compare yield and do due diligence.