How REITs Can Offer Portfolio Diversity

Real Estate Investment Trusts or REITs have gained in popularity in the last 15 years, as investors are attracted by their high dividend yields.

REITs are governed by a different set of rules from traditional stocks, as they are required to pay out at least 90% of their taxable income as dividends to their shareholders. This makes them the ideal investment for those seeking a steady income or looking for higher yields than bonds or savings.

Investors looking to diversify could look to REITs as a viable option. Here are three ways that REITs could offer diversity.

Exposure to real estate

A big lure for investors is how REITs can offer diversity to one’s portfolio. Investors, who had hoped to have exposure to real estate but were put off by the high capital requirement to buy a property, can now turn to REITs.

Unlike owning our own property, REIT investors need not fuss about rent, repairs or maintenance. They are also highly liquid as they are traded on the Singapore Exchange, which makes buying and selling them easy and cheap.

Different types of properties

There are 32 REITs in Singapore. Each REIT has a portfolio of properties. This mitigates the risk of owning just a single property.

With more REIT listings appearing on the Singapore market, investors now have greater choice. REITs typically focus on different types of properties such as residential, industrial, healthcare, retail or a mix.

Investors in Singapore can even choose to further diversify their portfolio by investing in REIT Exchange Traded Funds that tracks the performance of a combination of REITs.

Overseas exposure

Many of the REITs listed on the Singapore Exchange have properties overseas. REITs offer investors a chance to invest in properties outside of Singapore. They could have exposure to countries such as China, India, Malaysia, Australia and even Europe and America.

My colleague, Stanley, recently wrote an article on why home bias investing may leave investors unnecessarily overly exposed to local risk. By investing in REITs that offer geographical diversity, we can hopefully mitigate the risk of a local downturn.

The Foolish takeaway

REITs have been gaining interest from a wide range of investors, who look to diversify their portfolio to include real estate.

It can also give investors greater diversity than owning a single investment property with much less hassle. That said, investing in REITs does come with their own share of risks. Investors need to be familiar with these risks before making an 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 Jeremy Chia doesn't own shares in any companies mentioned.