Investing in REITS

Mr. Tan,
I am curious abt REIT. While I understand what they are, I do not fully appreaciate their risk. How different are they from bonds? Are they riskier than bonds? What are the chances of a REIT paying less dividends in later years. Can a REIT go bust?

REPLY

A bond gives a guaranteed interest payment and returns the principal at the end of the term. A REIT pays out a dividend depending on the net rental income of the properties that are held by the trust, and does not have a redemption date.

Investing in a REIT is like investing in the underlying properties. All the investors of the REIT collectively own the underlying properties in their respective shares.

The rental income is expected to change with economic situation and the supply and demand of properties. The dividend paid by the REIT is expected to fluctuate in the same manner. Over the long term, rental income is expected to increase with inflation and economic growth.

The risk of investing in a REIT is low. It is like investing in a property that you have paid in full. Even if the rental income comes down, you will still get some income.

A REIT may have some risk, if it borrows money (i.e. leveraging) to invest in the underlying assets. A leverage REIT has to pay the interest on the borrowed money, before paying the net income to the investors. In Singapore, the REITS are allowed to borrow up to only a low percentage (maybe 30%) of the asset value, so the leveraging is low. The risk is also low.