Deep, deep dive
REITs 101: Their Basic Purpose (And the Comparison to Shares)
Have you ever walked through a shopping mall such as Mid Valley Megamall and wondered how great it would be if you were its owner, sitting back and collecting rent from the shops every month? Well, you can be a small part of that because Mid Valley is in fact owned by a REIT.
A REIT is simply a publicly-listed company—set up as a trust—which pools investors’ monies to buy and manage income-producing real estate (e.g. malls) on their behalf. They are listed on stock exchanges such as Bursa Malaysia/KLSE. You can buy and sell them just as you would regular shares, and their prices fluctuate based on market forces as well.
Both also grant ownership rights. When you buy shares in a company, you technically become a partial owner of that business. The same goes for when you buy shares in a REIT—you are essentially also a partial owner of all the properties owned by said REIT.
However, there are a few differences between Malaysian REITs (sometimes called M-REITs) and shares to know about.
- REITs are only allowed to invest in assets consistent with the REIT’s strategy and investment objective—which must be clearly stated. 75% of a REIT’s total asset value must always also be in rental-generating real estate
- REIT’s borrowings are capped at 50% of total asset value
- REITs pay out at least 90% of their net income as dividends. They do this to maintain tax privileges such as exemptions on rental income and real property gains tax
- Dividends paid out to REIT unitholders are automatically charged a 10% withholding tax by the government (although the REIT association is lobbying for a tax exemption)
A Snapshot of the Malaysian REITs Landscape
As of this writing, there are currently 16 REITs listed on Bursa Malaysia. You can find a list of them by heading to the ‘Equities Prices’ page on the Bursa website and typing ‘REIT’ in the search box.
Screenshot from Bursa Malaysia as of 26 January 2020
REITs can usually be categorised by the property sector they invest in, which are:
- Residential (none in Malaysia currently)
For example, the YTL REIT is a hospitality REIT that owns hotels all over the country. However, there are also REITs that don’t fit neatly into the above categorisations. The SUNREIT (by Sunway), for instance, owns a diversified portfolio comprising hotels, malls, office buildings, and industrial facilities.
For information on how to buy REITs, please refer to our ‘How to Buy Malaysian Stocks’ guide here.
The Six Parts of a REIT’s Structure
Although this is not essential to investing in REITs, understanding its basic structure will give you a clearer picture of how they operate.
The six parts of a REIT’s structure are:
- Unitholders: The investors who buy shares (or units) in a REIT from the stock exchange
- Properties: The properties the REIT owns in its portfolio
- Trustee: The legal owner of the REIT’s assets—it holds the assets in trust on behalf of the unitholders
- REIT Manager: The REIT equivalent of a fund manager. Responsible for strategic and investment decisions. Receives a percentage fee of a REIT’s total asset value and net property income in return
- Property Manager: Provides property management services for the REIT’s properties for a fee
- Sponsor: A company that is a major shareholder of the REIT. E.g. the sponsor for the SUNREIT will be the Sunway Group. A strong sponsor lends credibility to the REIT
Source: Bursa Malaysia