Investing in REITS – What Should You Consider
Investing in REITs is one great way to build an equity or fixed-income portfolio. Due to the ability of
REITs to generate dividend income along with capital appreciation, it provides greater diversification and greater returns at a lower risk. It is a great tool to complement with stocks investment, bonds and cash.
REITs generally own and/or manage income-producing commercial real estate, whether it’s the properties themselves or the mortgages on those properties. You can invest in SREIT or Singapore REIT Index locally in Singapore.
What To Consider In Investing In REITs?
If you are a REITs investor, it is essentially means that you are unit holders of the REITs and you are also subjected to similar risks as the holders of other diversified asset portfolios.
Some of the factors which affect your investment in REITs are :
- Unit price of REITs may likely to follow the trend for the rental income and property prices. Since the objective of REITs are to invest in real estate assets, weaker property prices could adversely affect the value of a REIT. This would mean that you can invest more in REITs when the property or the rental market is trending down.
- Depending on the types of REITs, e.g. healthcare REITS, retail REITs or office REITs, maintenance cost to resolve the wear and tear and/or unexpected disasters which damage physical real estate assets owned by the REITs will need to be considered. Such cost will attribute to the returns a REIT can achieve.
- Quality of assets owned by the REITs, essentially affecting sustainability and stability of revenues; Especially for the healthcare REITs such as First REIT, the assets which this type of REITs owned attributed to the long term stability of income that it can generate.
- The trend in Federal interest rate will affect the interest cost which the REITs need to pay for the loan. The next possible increase in federal rate may be Dec 2016 or early 2017. If the Federal interest rate increase to a significant amount, it will make the local SReits less attractive. The key indicator to watch out will be its gearing ratio. Ideally, it should not be over 35%.
- For those REITs which own properties in the regional, they are also subjected to currency exchange rate risk, e.g. Capitaland Retail China Trust.
- Any cooling measures on industrial/non residential properties will also affect the growth of the local REITs
- The track record and performance of its management team
Different investors will have different risk appetites towards investment portfolio. For risk diversification, investing in REITs is definitely a good choice. In my next post, i will highlight the benefits of investing in REITs.