Updated: August 4, 2020
I wrote about Real Estate Investment Trusts or REITs several months ago, but its focus was investing on REITs in global markets.
At that time, there was little information available on Philippine REITs even though there was already a lot of buzz about it. Particularly, that Ayala would soon be launching the first REIT in the country.
Fast forward to today, investing in Philippine REITs is now a reality, 11 years after Republic Act No. 9856, or the REIT Act of 2009 was implemented.
So what exactly are Real Estate Investment Trusts? How do you make money from REITs? How do invest in REITs? We’ll answer all these questions and a lot more in this article.
What is a REIT?
Real Estate Investment Trusts are investments that allow you to earn from large-scale properties without having to put out a lot of money.
It all starts with a REIT company, who will buy income-generating properties such as condominiums, offices, hospitals, hotels, warehouses, etc.
Then, the REIT company will issue or sell its shares to the public, making them part-owner of the company.
Investing in REITs means buying those shares to receive dividend income from the property rentals or making money from the appreciation of the price of the REIT shares.
How do REITs work?
First, a real estate company will form a REIT company. For example, Ayala Land forms AREIT, which owns and operates three buildings in Makati.
Second, the REIT company issues REIT shares that investors can buy. These shares are available through the stock exchange. In the case of AREIT, it listed on the Philippine Stock Exchange through an IPO or Initial Public Offering.
Third, the funds from the sale of the REIT shares will now be used for the company’s expansion. Usually, to buy or acquire another property.
Lastly, if you own REIT shares, then you will receive regular income as dividends for as long as you own those shares.
How do you earn from REITs?
First, through regular dividends. REIT companies own and make money from rental properties, and 90% of those earnings are given back to investors as cash dividends.
Secondly, as the REIT company grows, the price of the REIT shares may also go up. So, you’ll earn through capital appreciation if you decide to sell your shares.
Four benefits of investing on REITs?
1. Generous Yields
You get passive income that’s potentially higher than yields from time deposits and government bonds.
2. Regular Income
The income of REIT companies is exempt from 30% corporate tax as they are required to pay out 90% of their earnings in the form of cash dividend to REIT investors.
3. Affordable and Simple
You get the benefits of a property owner, without the high cost of acquiring them and all the headaches of operating and managing them.
4. Easy to Buy and Sell
After its IPO, REIT shares will be traded on the Philippine Stock Exchange. It’s a near-cash investment unlike when directly buying and owning properties.
What are the risks of investing in REITs?
First, if rental demand for the properties declines, then the REIT company will have lower income due to higher vacancy and lower lease rates. This means the REIT company will pay lower dividends to investors.
Secondly, REITs become less attractive as an investment when interest rates go up and traditional fixed-income instruments or bonds give out equal or higher rates.
How to know if a REIT company is a good investment.
Ayala Land’s AREIT is just the first and more are coming. Specifically, as of writing, Double Dragon will be listing their REIT later this year.
Thus, it’s important to know if a particular REIT company is worth it or if you should just skip the investment.
The first thing you should do is to evaluate the assets of the REIT company. Gauge the quality of the properties if they are attractive to lessors or renters.
Secondly, check the track record and reputation of the real estate company. Do our due diligence. Research on their past projects. Did they turn over those projects on time? Are the properties well-maintained today?
Lastly, consider the location of the properties. Are they in thriving areas with a lot of growth potential? It helps if their assets are PEZA-accredited, or if there are other upcoming infrastructure projects in the area.
REITs vs Property Stocks: Which is better?
What’s the difference between investing in a REIT company versus buying the shares of the real estate company itself. For example, why buy AREIT shares when you can just buy Ayala Land, Inc. (ALI) shares?
The answer depends on your financial goals. Because REITs are required to pay out 90% of income as cash dividends, you are assured of passive income. Unlike buying shares of the parent company, dividends are not guaranteed.
So, if you’re after regular income or yield, then a REIT is better for you as an investment.
What are the fees when investing in REITs?
After its IPO, REITs will be traded like stocks and as such, regular buying and selling fees apply, and this will depend on who your stockbroker is.
At the same time, there’s also a small custodian fee of 0.01% per annum charged by the Philippine Depository & Trust Corp.
Do you have additional questions about REIT investments? Type them in the comments section and let me answer them.