No, there are no mistakes in the
headline of this article, nor have I gone mad. During this severe
global economic downturn, many savvy investors are waiting to snap up
prime properties from motivated sellers. While everyone is looking
towards the secondary market for great deals, many investors are
blissfully unaware that the prices of many Malaysian Real Estate
Investment Trusts (M-REITs) have been beaten down so badly that it is
now possible to buy them 30 per cent below their Net Tangible Asset
(NTA) with Return on Investment (ROI) of more than 10 per cent per
annum!
Instead of
doing direct property investments, you have the option of investing
indirectly by buying stocks of listed property developers or REITs. In
this article, we will focus on the latter.
REITs
are essentially trust funds that buy, develop, manage and sell real
estate assets such as office buildings, shopping malls, hotels,
serviced apartments and warehouses. REITs offer investors the
opportunity to invest in a portfolio of property assets through the
purchase of a publicly-traded investment product. Units of listed REITs
are bought and sold like other shares at market-driven prices. The
transaction costs of REITs are exactly the same as shares.
REITs
will appeal to risk-averse investors who are looking for good dividend
yields above the fixed deposit rates. They are also suitable for people
who wish to invest in properties but do not want to be troubled with
property and tenant management issues. The benefits of investing in
REITs include:
- Portfolio
diversification: REITs typically own multi-property portfolios and
diversified tenant pools with different lease lengths. This reduces the
risks of reliance on a single property and/or tenant as in the case of
directly owning a real estate asset on your own.
- Income
distribution: REITs have regular cash flows as most of the revenues are
derived from rental payments under contractually-binding lease
agreements with specific tenures. The majority of the tenancy or lease
agreements contain provisions for step-up rental rates over the
tenancy/lease period. By law, REIT’s have to pay out nearly all (at
least 90 per cent) of their net income to unit holders as dividends.
- Property
market participation: Most REITs are structured around large commercial
properties. With REITs, you can own small stakes in such properties
that you are unable to do on your own. As the market value of the
properties in the REITs gradually appreciates over time (three per cent
to eight per cent), so will the price of the REIT. This offers you a
good hedge against inflation as opposed to leaving your money in fixed
deposits where the purchasing power of your money inclusive of the
interest earned will be lower one year from the time you deposit an
amount.
- Professional
management: REITs are managed by full-time professional property
management companies. You do not have to worry with the hassle of
administering the property like finding or servicing tenants, repairs
and maintenance to the property, dealing with the tax authorities and
so forth.
- Liquid
investments: Buying, selling or trading of REIT units is just a phone
call away as the market for them in fairly liquid on the local bourse.
It definitely beats trying to find a buyer, arrange viewing and haggle
over the price of your property in case you need to sell your property.
There are currently 11 REITs listed on Bursa Malaysia. For the purpose of this article, we will focus on three, namely:
For more information on each of them, do visit their websites.
At the time of the writing of this article (December 10 2008), the
market prices of these REITs had dropped so much that they were trading
over 30 per cent below their NTA. NTA is an accounting term and is the
total assets of a company, minus any intangible assets such as
goodwill, patents and trademarks, less all liabilities. Please see the
table below.
It
is highly unlikely that the prices of the properties in these three
REITs would have dropped by over 30 per cent, since most of their
properties are located in the cheaper sub-urban areas and are tied up
by long-term tenancy agreements with blue chip companies. For example
(except for the last three months), AXREIT has traded at a premium
above its current NTA of RM1.67. Take a look at the AXReit chart below:
At its current NTA of RM1.67, AXReit’s yield works out to a decent 7.5
per cent per annum based on last year’s payout. However, at the current
market price of RM1.15, the yield is 10.8 per cent per annum. You can
recover your cost of investment in about nine years – assuming the
dividend payout remains the same.
For
this reason if you have long-term fixed deposits, investment in REITs
is certainly worth considering. However, please bear in mind that every
investment has its pros and cons. Investment in REITs will not give you
the leverage effect, unlike buying physical properties where it is
possible to get up to 90 per cent loans. Once the economic environment
improves in a few years time, it is possible that many stocks may
double or even triple in value. It is highly unlikely that REITs can
ever give that sort of spectacular return. The most you should expect
is that it will increase back to their NTA levels.
We
hope that this article has given you a general understanding on the
comparison between REIT and physical property investments. In the next
article, we will look into the ROI of these two investments.
If
you have any comments on this article or questions, please email to me
at achievers88@yahoo.com. I would highly recommend that you sign up at
our moderated getrichbook egroups at:
http://finance.groups.yahoo.com/group/getrichbook/
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free for all my book readers and readers of this article. Only relevant
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Article Contributed by:
Milan Doshi
Financial Trainer and Best Selling Author of
“How You Can Become a Multi-Millionaire Real Estate Investor!”
For more information, visit www.milandoshi.com
Copyright 2008 by Milan Doshi
