Return of REITs

There are comments that emphasize leverage works well on direct property investment but not REITs.  Real estate leveraging means you are using other people’s money (such as housing loan from bank) to invest in properties.  You may rent out your investment properties for rental in the expectation that net rental received (after installment as well as all related charges, expenses and/or opportunity loss) able to provide impressive return over your investment outlay. 



For example, you may borrow $190k for a $250k double storey terrace house from a bank.  That means your initial capital outlay is $60k with monthly housing loan installment of, say, $1.5k or $18k annually.  You have rented out this property for a monthly rental of $2.5k or $30k annually.  Assume there is no other expenses incur, this net annual rental received of $12k ($30k gross rental minus $18k installment) is generating an annual return of 20% ($12k net rental over $60k capital outlay).  Very impressive, isn’t it?  Please note that this return may be true only if there are no other charges (such as house maintenance) and/or opportunity loss (think about the condition like the property is left vacant after ex-tenant moving out while waiting for the next tenancy).

As highlighted in my previous post of “Direct Real Estate Investment vs. REITs”, there are a number of other aspects on direct property investment that need to be factored in.  Just like all other investment vehicles, direct property investment is not suitable for everyone.  For investors who would like to have exposure on property but unwilling to face the risks on direct property investment, REITs is an alternative.

How is the actual return of REITs?  I have been investing in REITs since 2007 and the table above shows the return of my REITs investment.

For the weight average holding period of about 1.5 years, these holdings have given my 10% in dividend gain and 22% in unrealized capital gain as at 31st May 2010.  By annualizing these returns, this portfolio provides a remarkable and straightforward annual return of 21%, hassle free (as fund managers will take care of all property investment related problems).  It isn’t that bad, or is it? 

As REITs are listed in Bursa, just like other counters, their prices fluctuate from time to time.  Therefore, unlike real properties with relatively stable value, do not think of buying REITs through leveraging.  It is just too risky.  Another trick of buying REITs is, just like buying other share counters, to buy them when they are cheap, really cheap.  Therefore, buy low and sell high strategy is applied here.

To properly diversify the risk, we should not put all eggs into one basket.  Therefore, REITs can only be considered as part of our overall investment portfolio.  The concept of asset allocation is applied here.  To me, REITs only constitute about 4% of my investment portfolio so that I will be able to allocate my funds into other investment such as shares (which able to generate more exciting return than REITs), unit trust, gold etc.

Good luck.