Businesses have been shuttering, some maybe for good. And many of those that are still operating are losing revenue overall, with grocery stores and pharmacies being the main exception.
These extraordinary circumstances mean there are extraordinary problems to resolve.
After crunching the numbers, it appears that real estate investment trusts (REITs) will survive along with grocery stores and pharmacies.
Indirect property investment describes the investment of companies specialising in property and real estate, property index derivatives, Real Estate Investment Trusts (REITs) or corporate property organisation bonds in stocks and shares.
The investor then expects to earn a financial return based on the market performance of certain securities and shares, bonds etc. in the form of dividends or a rise in the value of their stock holdings.
An investment trust in real estate (REIT, pronounced ‘reet’) is a security that directly invests in real estate and sells like a stock on exchanges.
It invests and acquires special tax considerations through assets or mortgages. REITs deliver high returns and a liquid method of investing in real estate as rewards for investors.
In the development of a balanced property portfolio, both direct and indirect property investments are important for many experienced property investors.
In comparison to sticking to one niche or property asset class, indirect investment in property assets is a perfect way to spread some of your risks while also expanding your portfolio.
Taking the indirect investment route for property will give you greater potential for success and it is also likely to leave you less vulnerable.
How to invest in REITs
Buyers would need to find a reputable broker or financial advisor to invest in a real estate investment trust.
These financial experts would have access to a number of both publicly owned and non-traded REITs, depending on their holding firm. They will be able to customise your investment portfolio to suit your needs.
While it’s important to seek advice from a credible broker or financial advisor, it is also important to go to an appointment with an awareness of REITs and how they can complement your investments.
Advantage 1: Lower up-front capital investment
For substantial up-front capital spending, there is a reduced necessity.
As part of any financing arrangement, real property acquisition also involves a large capital deposit. On the other hand, shares may be purchased to fit the budget of the investor.
Advantage 2: Improved asset liquidity
There are active stock and share markets that make it much easier to sell them easily and cost-effectively.
On the other hand, real property assets can take time to sell, and the transaction costs associated with property transactions can also be high.
Advantage 3: Reduced management costs
Real property can be a resource and time-intensive asset to manage, and investment keeping costs can be increased by this.
With little regular input, if you want to, you can keep the shares.
Advantage 4: Diversification
If other stocks or shares are down and REITs typically have a low correlation to the performance of other asset classes, having a REIT in an investment portfolio is a benefit.
The risks of REITs
REITs are exchanged on the stock exchanges like the Kuala Lumpur Stock Market, which means that they have elevated risks that would be a characteristic of riskier equity investments.
They are also significantly impacted by real estate price weakness. Even though the long-term returns of REITs are remarkable, there have been periods in which they have substantially underperformed.
During periods when interest rates are elevated or increasing, REITs often have the potential to generate negative total returns. Investors usually switch out of safer assets to pursue income in other parts of the market when rates are low.
They bear a measure of risk substantially greater than government bonds, like all equities.
Requisites for managing a REIT
Real estate investment trusts, including mutual funds, enable both small and large investors to gain equity in real estate projects.
It is regulated by a law that aims to provide opportunities for investment and strong vehicles for profits. It is similar, in other words, to stocks traded on the market.
REITs have the following requirements:
- All REITs should at least have 100 shareholders or investors and none of them can hold more than 50% of the shares.
- All REITs must have at least 75% of its assets invested in real estate, cash, or treasuries.
- 75% of its gross income must be obtained from real estate investments.
- All REITs must pay dividends equaling at least 90% of their taxable income to shareholders.
- All REITs must be managed by a Board of Directors or Trustees.
REITs are certainly an alternative to physical property investment as it spreads out risks while allowing for diversifying your property investment portfolio.
To be a wise investor, keep in mind the risks involved and pay attention to how the REITs sector performs as the world recovers from Covid-19 thanks to the mass vaccination programmes most countries are rolling out.
This article first appeared in MyPF.