25 July 2013

REITs - Things To Note when Investing

I received some inquiries from my clients on REITs investing and wish to share it here to you as well. REITs stands for Real Estate Investment Trust, a financial product that managed by real estate professionals with sponsors of buildings.

So how does the REITs make money for the investors? It mainly comes from disposal gain and rental income received from tenants. If you believe in long term inflation environment unlike what was happened in Japan, then you can take opportunity to invest in REITs. 

However please do take note that normally REITs acquire new assets by issuing new shares or from bank loans. So it could increase borrowing cost or equity cost when interest rate started to increase. I ever heard that Singapore government is in discussion to prevent the property bubble to burst when the bank interest rate is rising to possible up to 3% in later years.

Currently REITs are providing yield of in between 5% to 10%, compared to more than 10% in financial crisis. So it means that if the REITs price are affected by both drop in interest rate as well as rise in interest rate. But if we take long term perspective, the interest rate would eventually go up when the economy activities are picking up. So, it always not late to invest in REITs, but have to take note of the points I mention above.

Enjoy investing in REITs, for long run.

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