Understanding REITs in Malaysia

The term REIT stands for Real Estate Investment Trust. It is a trust fund that holds/ invests in RENTAL properties. Its major incomes is rental income and it is required to distribute most of its profit as dividend to its holders.

REIT can be one of the very exciting instrument for the purpose of cumulating income generating assets. We like REIT though with some very strict conditions.

Early this year, Securities Commission issued guidelines on REIT. These are improved guidelines for property trust funds. The market was and is still fairly excited about the changes. The first REIT, Axis-REIT, was listed on Bursa Malaysia (KLSE) in August 2005. We are expecting REITs from YTL Group, Sunway City and probably Landmark, IGB (for Mid Valley city) and KLCC, though these are in the pipelines. We are hoping Jaya Jusco will soon jump into the band wagon too.

What is REIT?

This is the exact words from investopedia's article, "What are REITs?":
"REIT has two unique features: its primary business is managing groups of income-producing properties and it must distribute most of its profits as dividends."

Unlike unit trust, which is sold through agents or banks, REIT is traded in stock exchanges. So it gives investors returns through capital appreciation from price changes and dividends (just like any listed company's stock).

Why do we like REITs? What are the benefits of REITs?

REIT holds rental properties. So its main incomes are rental incomes. Such rental properties can be office buildings, shopping malls, lands, etc. Usually, REIT will pay out at least 90% of its taxable profit as dividends. This is either required by regulations or due to tax incentives.

Rental is usually a fairly consistent source of income. So you see, with at least 90% payout, the income stream invested in REIT is fairly consistent for investor.

This makes REITs high-yield stocks and extremely attractive as income-generating assets or assets(i).

As investors, we just need to invest a small amount to own part of the shopping mall, offices, lands, etc. through REITs. We can sell it anytime and easily through stock markets. The transaction cost to buy and sell REITs is low compared to normal properties. We can own a diversified portfolio of properties. These are the benefits that the usual property investments cannot provide.

Yes, stock prices of REITs fluctuate. However, as long as the rental properties are well managed, the rental markets are stable and the rental incomes are consistent, you can get consistent dividend incomes. And if you bought the REIT at a good price, it gives you consistent good ROI, regardless of fluctuations of stock prices.

Do you still remember the objective of financial planning? For FPM that is to accumulate income generating assets.

More on the explanation of REIT from Investopedia.

However, M-REIT is a bit different from the usual REIT...

M-REIT refers to REIT in Malaysia that is regulated under the above mentioned SC's guidelines.

In a way, Malaysians are non-conformists. We always want to be a bit different from the rest of the world to show that "kita boleh". :-)

These are the salient features of M-REIT:

1. Investors' dividends will be taxed at investors' books.
2. Non-residents' dividends will be taxed at 28%. It is an upfront and final withholding tax.
3. There are NO explicit requirement of minimum payout ratio in the guidelines.

Item 1 makes M-REIT less attractive to local investors.
Item 2 makes it less attractive to non-resident investors.
The worst is item 3 - there is no explicit minimum dividend payout requirement. So as investors, we have to read the terms of the REITs carefully. We have to make sure the REIT that we invest in states that it will pay out 90% of its taxable profits even though it is true that the tax structure does encourage REIT to pay out dividends as high as possible.

Where to buy M-REIT?

You buy REITs through your stockbrokers/ remisiers. You can also book your trade through online stockbrokers. Check out the list of Malaysia online stockbrokers in our directory. REIT is listed at Bursa Malaysia or KLSE (old name). Or you can buy it through IPO. You may find the opening and closing dates to subscribe for IPO at the web site of Bursa Malaysia.

Unit trust agents or banks do not sell REIT, although REIT is trust fund. REIT's stock prices are determined by market supply and demand, just like company share prices. On contrary, unit trust prices are determined by NAV, net assets value, which is the value of its assets less liabilities (if any). It is calculated by unit trust companies daily.

Currently, there is one REIT, i.e. Axis-REIT, listed on Bursa Malaysia's TRUST section. The other three listed trusts are property trust, which is similar to REIT. Like REIT, property trust is subjected to the recent new guidelines from SC.

Part 1: Understanding REITs in Malaysia
Part 2: Understanding REITs in Malaysia (2)
Part 3: Investing in REITs