Do you want to get into real estate but don’t have the capital, then investing in REITs might be your answer.
Real Estate Investment Trusts (REITs) are an increasingly popular way for investors to gain exposure to the real estate market without actually owning physical property.
What are REITs?
A REIT is a company that owns and operates income-producing real estate properties. These properties can range from office buildings and apartment complexes to shopping malls and hotels. REITs allow investors to own a portion of these properties and earn a share of the rental income they generate.
How do investors earn?
REITs are structured like mutual funds, with investors buying shares in the company and receiving dividends based on the rental income generated by the properties they own.
They are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. This holds true for both the US and the Philippine markets.
In the simplest form, instead of you owning the apartment or a condo unit that you rent out, you instead buy shares of REITs and as an investor, you get a share of the profits of the REITs.
Examples of REITs
US REITs
- Simon Property Group (SPG) – they own and operate shopping malls and outlet centers throughout the US. Their top tenants are Gap, Laurentian Bank of Canada, and PVH Corp.
- Realty Income Corporation (O) – they primarily invest in freestanding, single-tenant retail properties leased to tenants in various industries, including convenience stores, drug stores, dollar stores, and supermarkets. To name a few of their tenants: Dollar General, Wallgreens, 7-Eleven, etc.
Philippine REITs
- Ayala Land REIT (AREIT) – the first REIT to be listed in the Philippines. They primarily invest in office and retail properties.
- DoubleDragon Properties REIT (DDMPR) – a real estate development company that specializes in mixed-use projects and primarily invests in office and retail properties, as well as industrial and hospitality properties.
Benefits of investing in REITs
There are several benefits to investing in REITs, including:
Diversification
They provide exposure to a diversified portfolio of real estate properties, which can help reduce risk and increase returns.
Income
Since they are required by law to distribute at least 90% of their taxable income to shareholders, this makes them an attractive option for dividend investors.
Liquidity
For REITs that are publicly traded, you can easily buy or sell them just like any other stock.
Professional management
Expect REITS to be managed by experienced professionals who are responsible for acquiring, leasing, and managing the properties in the portfolio.
Just imagine pag ikaw ang bumili ng property, ikaw lahat gagalaw. Ikaw magpapaayos ng unit, hahanap ng magrerent, mangongolekta ng bayad.
Potential Risks
Market risk
The value of REITs can be affected by changes in interest rates, economic conditions, and other factors that impact the real estate market. Naalala nyo yung balita about pagban sa POGO? That affected DDMPR’s share price.
Management risk
The performance of REITs is largely dependent on the quality of the management team, which can vary from one REIT to another.
Concentration risk
Some REITs may be heavily concentrated in one type of property or geographic region, which can increase risk. During the Covid-19 pandemic, REITs that lean on leisure-type businesses were greatly affected.
Dividend risk
Just like any other stock, there is no guarantee that dividends will be paid, and they may be reduced or suspended in certain circumstances.
Blogger’s Note
All in all, REITs are a good source of dividends. Currently, my PSE portfolio is heavy on REITs while I only buy O for my US portfolio.