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REITs for Stable and Less Risky Investment

REITs stable dividend. Low risk investment.


REIT stands for Real Estate Investment Trust. To make it simple, purchasing REITs are like collecting money from the public to buy a property. To many of us, in our entire life, our ability is only to purchase and own a house / shop. Now try to think, what about those shopping malls, tall office building? Who owns them? Most of it could be owned by REITs company. In short, REITs invest in various types of properties and earn rental income from it.


When you purchase a property, you own a house, a tangible asset. On the other hand, REIT is an intangible asset. You don’t directly own, for example, the shopping mall. What you own is the stock of the REIT company. Hence, REITs can be purchased from normal stock market (KLSE) using trading account.

Midvalley Shopping Mall is a property owned by IGB Reit Malaysia. Example of properties owned by REIT.

Unlike stocks, REITs is regulated to distribute 90% of its net income to the shareholders in the form of dividend. Meanwhile, stocks are not compulsory to pay out dividends. In Malaysia, unfortunately, the distribution income of a REIT is subjected to tax, at a fixed rate of 10%. Nevertheless, this is considered very low as compared to countries like the US, which tax rate is 30%.

As compared to stock, REITs are much more stable and less risky. This is because first of all, it owns property. Furthermore, its income is generated through the rental of property. Usually, this massive building is rented for quite a long term (around 2-3 years before contract rate is renegotiated). For instance, KLCC is owned by KLCC REITs. Do you think they will change their office easily, even if the REITs company decided to increase the rental rate slightly?

Moreover, for reputation purpose, once a company locates its office, it will not relocate again that soon. This is because the location and the contact of the company has been advertised heavily. Relocation means more expenditure and furthermore, it also makes it harder for customers to find the company. Therefore, unlike some manufacturing-based stock, REITs has an upper hand of more stable income even when the economy is down.

Similar to stock, one can earn money from REITs through
-      Distribution income / Dividend (fixed at 90% of company’s net income)
-      Appreciation in the price of REITs stock / Capital Gain
Conservatively, assuming the price of REIT stock doesn’t appreciate in the year, average Malaysia REITs will still generously give out around 6% dividend yield. Still, this is 3% more than our current FD rate. And be noted that 3% difference in the rate of return every year could make a vast difference in 10 years time.
Read more about how powerful the 3% difference in rate of return here.

1.Small investment is acceptable
You are a young lad, just step into the complicated working world. You have a pathetic income of RM3k per month. After paying off your living expense, you only have RM1k left for saving. To buy a decent house (property), which at minimum cost you RM350k (Ipoh), you need to at least RM35k to make the down payment. Can you afford it? Nope. So, you probably need to save monthly for 3 years in FD before you have the ability to buy a house. What about REITs?
Now, this is the beauty of REITs. You can invest anytime, anywhere in any amount you like. If you only have RM1k, but would like to earn higher rate of return for your money, you could invest in REITs.

2.Liquidity matters
I am pretty sure that you are aware of how hard it is to sell out a house. First of all, finding a buyer for your house is not easy. Secondly, you have to go through all kinds of processes such as meeting the lawyer to get the sales and purchase agreement. Thirdly, Malaysia imposed Real Property Gain Tax on any property that is sold within first 5 years too. All this made selling of property painfully hard. REITs on the other hand, because is a kind of stock, can be easily sold out to market at any time and get the money back in within 3 days time.

Current RPGT rate Malaysia

Real Property Gain Tax rate from 1995 to 2016 in Malaysia

3.Diversification of investment
Some REITs companies own not only the property in Malaysia, but foreign countries like Singapore, US and Australia too. Thus, buying REITs are diversifying your investment portfolio. With more and more ugly news being unveiled in Malaysia, it is always good to invest somewhere else that is more politically stable.

4.Steady Income rules!
Another good thing about REITs is that you don’t have to worry about the occupancy rate. Unlike property, you will be extremely worried if your tenants are moving out and you need to find a replacement for that. Furthermore, if you’re unlucky enough, your tenants might be some ill-mannered spoilt brat who damaged your house! In the end, you might even need to fix it using your own hard-earned money.
But REIT is different. Let the professional manages the properties for you, from sourcing tenants to increasing their contract rates and finally maintaining the properties. Hence, allowing you to just sit and enjoy the 6% dividend annually. As easy as apple pie!

Finally, you should be aware of the types of REITs that are available in Malaysia. They can be categorized into:
Retail REITs: Invest in shopping malls. Earnings could be affected when the economy is gloomy as more retailers tend to shut down their business.
Office REITs: Earn rental income through office buildings that it has.
Residential REITs: Focuses on rental apartment or condominium.
Hotel REITs: Operates and manages hotel properties. The occupancy rate of the hotel is important in determining how good the hotel REITs are.
Hybrid REITs: Invest in a mixed portfolio of properties.

This is the basic for you to understand before buying REITs. Have fun exploring REITs!
If you are still wondering what kind of investment is available, stay tune!

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