Wednesday, November 23, 2005

Investing in REITs



When we invest in REITs we are looking for an instrument that provides high, consistent and growing dividend income. The REITs that we invested in must be able to generate sustainable and growing rental incomes from their rental properties business. Without a good rental properties business, the REITs could not distribute sustainable dividends to its shareholders.

Other than dividends income, the fluctuation in REITs share prices enables us to make capital gain. A well-managed and growing rental properties business, for REIT, will inevitably lead to higher dividends payouts and therefore higher share prices. More on reasons to invest in REITs.

The key to invest in REITs successfully is to know the sustainability and potential of their rental income, the management integrity and their intention and competency to improve and grow their rental properties.

A good REIT has
  • Sustainable and improving rental incomes
  • Good management with integrity in managing the Reit
  • Good management with intention and competency to improve and grow the properties in the Reit

For sustainable rental income:
  • The properties in the Reits must be well-located, well-managed and well-maintained
  • The Reits must have assurance of future income without relying on mere few big tenants

For growing rental income:
  • Location, location and location of the properties in the Reit
  • The management is actively seeking to increase properties held in the Reits
  • The management is actively seeking to increase value of the properties in the Reits

Translate the criteria into checklist:

Questions to answer when invest in REITs:
1. Does the Reit have a broad base tenants in diversified industries?
2. Does the Reit have quality tenants with rental contracts more than one year? An average 2.5 to 3 years contract length is good.
3. How is the conditions and the locations of the properties in the REIT?
4. Does the original issuer still hold at least 70% of the REIT? This question is the main reason why management would do good to the REIT. The bigger their stakes in REIT the bigger the incentive for the management to manage the Reit well.

REITs we must avoid are those with properties that dumped by the issuer. The issuer would hold very little stake in the REIT after disposing their unwanted properties into REIT for a good profit and to earn management fees, trustee fees, etc. from the REIT.

To learn more about investing in REIT, check out this guide.

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