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What To Look Out For In A REIT

Real Estate Investment Trusts, or “REITs” for short, have been slowly gaining popularity over the past decade. This should not come as a surprise as there are some real advantages for the existence of a REIT.

Establishing a REIT is a “win-win” solution for both asset owners and retail investors. For the former, tha REIT gives them an opportunity to unlock the value of their properties while the latter would have access to investing in large properties that they would otherwise not have. The most recent REIT to be listed on our local stock exchanges is OUE Commercial REIT (SGX: TS0U) with news of its listing first surfacing back in September last year. OUE Commercial REIT went public at S$0.80 per unit on Monday, but is currently down 0.63% 6.3% at Tuesday’s closing price of S$0.795.

In any case, like most investments out there, there are risks to be considered when investing in REITs. Here are some of them.

Yield

The first thing that most of us look at when investing in a REIT is normally its distribution yield. As a REIT has to distribute as least 90% of its distributable income, those distributions tend to be the most important aspect of investing in a REIT.

Generally, industrial REITs tend to have the highest yield while having the lowest possibility of capital appreciation. Retail REITs on the other hand, tend to have lower yields due to the higher possibility of appreciation in the value of their assets.

Currently, Ascendas REIT (SGX: A17U), an industrial REIT, is offering a yield of around 7% at its price of S$2.12 while CapitaMall Trust (SGX: C38U), a retail REIT, is offering a yield of roughly 5.6% at its per unit price of S$1.92.

Management Fee

The compensation plan of a REIT’s manager can give clues on whether their interests are aligned with that of the REIT’s unit-holders and can help investors look out for any potential conflicts of interests.

There are three types of fees: management fees; property management fees; and acquisition and divestment fees. These fees might be different for every manager, thus it might be worth a second look for investors before investing in any REIT.

Management fees are charged by the REIT manager for managing the REIT and helping to distribute the income to unit-holders. For example, Frasers Commercial Trust (SGX: KT8U) is being managed by a subsidiary of Frasers Centrepoint Ltd (SGX: TQ5). The manager charges the trust an annual base fee of 0.5% of the REIT’s total real estate value and also an annual 3.5% fee that depends on the total net rental income received by the REIT’s various properties, less the base fee paid.

For acquisition and divestment fees, we can take Suntec REIT (SGX: T82U), managed by ARA Asset Management (SGX: D1R), as an example. ARA charges Suntec REIT a 1% fee on the price of any acquisition made, while charging a 0.5% fee on the price of any sale made. Some managers might also charge a divestment fee based on the divested profit of the property.

Equity Funding

Lastly, as mentioned above, a REIT has to distribute as least 90% of its distributable income each year. As such, a REIT might need to raise more equity each time it decides to acquire new assets. As REIT investors, we might therefore need to be prepared to increase our investment in a REIT that we already have vested interests in if it decides to embark on major acquisitions.

Foolish Bottom Line

A REIT is a wonderful financial invention. Our local stock exchanges in Singapore currently have a good diversity of REITs for investors to choose from. However, similar to buying a property, it is important for investors to read the fine print and understand what they are getting yourself into before making any investment decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.