Investing in REITs is similar to investing in any other type of stock. As a result, REITs are subject to the same trading, payment, and settlement procedures as other securities. Before you can begin investing, you must first open a trading account and a Central Depository System (CDS) account, which keeps track of your stock purchases and sales.
The Securities Commission (SC) in Malaysia regulates REITs and has released “Guidelines on Real Estate Investment Trusts” under section 377 of the Capital Markets and Services Act 2007. (CSMA).
Step 1: Pick a brokerage firm
Select a suitable brokerage firm from the Bursa Malaysia website. Consider the commission fees charged by the broker, the simplicity with which transactions may be completed, if the broker is Syariah compliant, and how user-friendly the selected online trading platform is.
Step 2: Open a trading account and CDS account
Make an appointment with the broker to open these accounts after you’ve chosen a broker. You will most likely be requested to supply documentation such as copies of your identification and a bank statement. A lesson on how to utilize the online trading platform will be provided by your broker.
Step 3: Put funds into your trading account
It takes a few days to open an account. After your account has been activated, you can begin investing in the online trading platform. Funds might be added dependent on your financial situation.
KLCC REIT
The KLCC REIT, unlike many other REITs, only has three properties in its portfolio, but these are enough to make it Malaysia’s largest REIT by market capitalization. It consists of the PETRONAS Twin Towers, Menara 3 PETRONAS, and Menara ExxonMobil, which are all 100% occupied as of the end of 2020. The retail area of Menara 3 PETRONAS is the only exception, with a good occupancy rate of 93 percent.
Another thing to keep in mind is that, based on the prices on Bursa Malaysia, it is by far the most costly REIT to purchase. This is due to its consistent payouts and occupancy rates, which make it an appealing alternative for investors looking for REITs to invest in.
IGB REIT
The IGB REIT is one of the most well-known Malaysian REITs, with only two shopping malls in its portfolio. These two malls, however, are Mid Valley Megamall and The Gardens Mall in Kuala Lumpur, two of Malaysia’s most well-known shopping destinations.
Mid Valley Megamall has a 99 percent occupancy rate, while The Gardens Mall has a 92 percent occupancy rate, according to its most recent annual report. It’s incredible that they were able to sustain such numbers throughout the Covid-19 outbreak, but it’ll be interesting to see if they can do so with the multiple Movement Control Orders in place.
Sunway REIT
- Sunway Pyramid Mall, Sunway Medical Centre, Sunway Putra Mall, and Sunway University are all notable properties.
It consists of buildings under the Sunway Group across a number of industries, including retail, hospitality, corporate offices, and education, and is another of Malaysia’s most prominent REITs. Despite the pandemic, its retail and office properties have a strong occupancy rate, but the hospitality properties are suffering from travel restrictions imposed by the Movement Control Order.
The Sunway REIT’s diversity could be a critical element for potential investors, as well as a vital mitigator against pandemic-related constraints. It remains to be seen whether lower foot traffic will have a significant impact on the occupancy rates of its retail locations.
Pavilion REIT
Pavilion Mall, Pavilion Tower, Intermark Mall, Da Men Mall, and Elite Pavilion Mall are among the five properties in the Pavilion REIT’s portfolio, which includes some of the most well-known landmarks in the Klang Valley.
With properties in the retail and corporate office sectors – two of Malaysia’s most reliable industries – it’s no surprise that the company’s market capitalisation is currently hovering around RM4 billion, indicating investors’ faith in these evergreen industries. The occupancy rate of most malls is above 80%, according to the company’s latest annual report, with just Da Men Mall lagging behind at 68.9%.
Axis REIT
- Menara Axis, Axis Business Park, Bukit Raja Distribution Centre, and Tesco Bukit Indah are some of the notable sites.
Based on market capitalization, the Axis REIT is one of Malaysia’s largest, with a current value of about RM2.8 billion! It currently has a property portfolio that includes corporate offices, logistics warehousing, manufacturing, and retail facilities located across Peninsular Malaysia.
It’s well-positioned to buffer the effects of the Covid-19 pandemic thanks to its diversification, with dividend payout typically above 5% in previous years and only 4.31 percent in 2020. These optimistic figures are one of the reasons why this is one of Malaysia’s most popular REITs.
YTL Hospitality REIT
- The JW Marriott Hotel Kuala Lumpur, The Ritz-Carlton, and The Majestic Hotel Kuala Lumpur are all notable properties.
The YTL Hospitality REIT, as its name suggests, is in the hospitality industry, with a network of hotels and resorts spread around Malaysia. Investors should be aware that the YTL Hospitality REIT has worldwide exposure because it owns various properties in Niseko, Japan, as well as three Marriott Hotel locations in Australia (Sydney, Brisbane, and Melbourne).
It began buying Australian hospitality properties in 2012, and in 2017, it took over The Majestic Hotel Kuala Lumpur, making it the YTL Hospitality REIT’s eighth property in Malaysia. With the purchase of The Green Leaf Niseko Village in 2018, it expanded into Japan. While the epidemic will hurt REITs focusing on hospitality and tourism in the near term, it could turn out to be a wise investment in the long run if borders are reopened and travelers are able to travel freely.
Capitaland Malaysia Mall Trust REIT
The Capitaland Malaysia Mall Trust REIT is one of the most well-known Malaysian REITs, with only five assets, all of which are shopping malls. Within those five malls, however, there are now 1,146 leases, indicating an occupancy percentage of 85.1 percent at the time of writing.
It also had a healthy foot traffic of 32.4 million in 2020, making it a solid alternative for individuals looking for a REIT with a healthy rental cash flow. It’s another question whether it can retain these levels in the aftermath of the pandemic. When lockdowns are eased and retail returns to normal, this might rebound back in the long run, therefore investors with a higher risk appetite should consider buying shares now while prices are cheap.
How do I choose a REIT in Malaysia?
You can’t just look at dividend yield while looking for the finest REITs to invest in Malaysia. You should consider the quality of the properties a REIT owns, as well as the REIT’s plans to increase its distribution per unit in the future.
Here’s a quick rundown of five key factors to consider when selecting a REIT:
Property yield
The amount of money a REIT can create from a property is known as property yield. The bigger the yield on the property, the better. It demonstrates that the REIT’s buildings can yield more rental income. As an investor, you want a yield that is consistent or increasing.
Cost of debt
The average weighted interest rate a REIT pays on its borrowings is known as the cost of debt. The lower the cost of financing, the less interest a REIT has to pay. Debt expenses are typically varied in different industries. Retail REITs, for example, will have a different financing cost than industrial REITs. As a shareholder, you’ll want to compare a REIT’s cost of debt to others in its industry. The lower the debt interest rate, the better.
Gearing ratio
A REIT’s gearing ratio is computed by dividing its total debt by its total assets. A REIT with a higher debt-to-equity ratio has more debt. REITs in Malaysia are only permitted to borrow up to 50% of their total assets (the limit has been temporarily increased to 60 percent until the end of 2022).
We prefer REITs with a gearing ratio of less than 40% since it allows the REIT to have additional credit capacity in case it needs to borrow to complete an acquisition. A lower gearing ratio indicates that a REIT is more conservative and cautious when it comes to debt deployment for growth.
Price-to-book ratio
The P/B ratio compares the price of a REIT’s stock to its net asset value per share. A P/B greater than 1.0 indicates that the REIT is overvalued in relation to its net assets, whilst a P/B less than 1.0 indicates that the REIT is undervalued.
However, as an investor, you should not base your buy/sell choices on this ratio. Because of the quality of their assets, management team, and track record of making consistent distributions, several REITs may trade persistently above their net asset value. Instead, you may analyze whether a REIT is overvalued or undervalued by comparing it to its historical P/B norms.
Distribution per unit
When it comes to REITs, one of the most common mistakes new investors make is focusing solely on the dividend yield. The higher a REIT’s yield, the more appealing it is. This isn’t always the case, though. Due to a low share price, some REITs trade at high yields because the market finds them unattractive.
Instead, you should consider whether a REIT can regularly increase its distribution per unit (DPU). This is a better indicator of a REIT’s capacity to increase dividends in the long run, resulting in a higher yield-on-cost.
If you want an up-to-date table of these measures for Malaysia REITs, go to Malaysia REIT statistics.
You can also see a video presentation of these five measures with real-life examples here if you want to learn more: 5 Secrets To Investing In REITs For Passive Income
Can individuals invest in REITs?
Investors can diversify their portfolio by investing in both mortgage REITs and equity REITs using this choice. As a result, both rent and interest are sources of income for this type of REIT.
These trusts are similar to private placements in that they only accept a limited number of investors. Private REITs are often not traded on stock exchanges and are not registered with the SEBI.
Typically, public real estate investment trusts issue shares that are listed on the National Securities Exchange and regulated by SEBI. The NSE allows individual investors to sell and buy such shares.
These are SEBI-registered REITs that are not publicly traded. They are not, however, listed on the National Stock Exchange. These options are also less liquid as compared to publicly traded non-traded REITs. They’re also more stable because they’re not affected by market movements.
Advantages of REITs
- Consistent dividend income and capital appreciation: REITs are supposed to deliver significant dividend income as well as stable capital appreciation over time.
- Diversification opportunity: Because most REITS are exchanged frequently on stock exchanges, investors can diversify their real estate holdings.
- REITs are obliged to file financial reports that have been audited by specialists, as they are regulated by the SEBI. It allows investors to obtain information on topics such as taxation, ownership, and zoning, making the entire process more open.
- Liquidity: Because most REITs trade on public stock markets, they are simple to purchase and sell, enhancing their liquidity.
- Obtains risk-adjusted returns: Investing in REITs provides individuals with risk-adjusted returns while also assisting in the generation of consistent cash flow. It allows people to have a consistent stream of income to rely on, even when inflation is strong.
Limitations of REITs
- No tax advantages: REITs offer little in the way of tax advantages. Dividends received from REIT firms, for example, are subject to taxation.
- Concerns associated with market fluctuations: One of the most significant risks associated with REITs is that they are sensitive to market-related swings. This is why investors with a low risk appetite should consider the investment’s ability to generate returns before making a decision.
- Poor potential for capital appreciation: REITs have a low potential for capital appreciation. It’s partly because they give back up to 90% of their profits to their investors and only reinvest the remaining 10% in their business.
How much do REIT dividends pay?
REITs, or Real Estate Investment Trusts, are well-known for paying out dividends. Equity REITs have an average dividend yield of roughly 4.3 percent. However, there are a few high-dividend REITs that pay much higher dividends than the average.
A REIT’s dividend yield is determined by its current stock price. That means that even if a REIT pays a very large dividend, it won’t be a viable investment if the price falls dramatically.
When looking for dividend income, it’s crucial to look at more than a REIT’s yield. You’ll want to look at criteria that will tell you how healthy a REIT is and how likely it is to pay you a nice annual dividend year after year.
When investing in a high-income REIT, check sure the dividend yield isn’t too good to be true. There are a few warning signals to look for that could indicate problems ahead.
- Over-leveraged. It’s possible that a REIT pays big dividends because it took on too much debt to buy its assets. If their real estate investment portfolio is overleveraged, they are extremely exposed to real estate market downturns or vacancy rises.
- Payout ratio is high. Because REITs are required to deliver 90% of their taxable income to shareholders, they can offer substantial dividends. However, tax deductions such as depreciation are not included in taxable income. This allows them to maintain some cash on hand. A high-dividend REIT’s high payout ratio may explain why it pays so well. The difficulty is that they don’t have enough liquid money to deal with unanticipated downturns. A REIT with a lower payout ratio will have more cash on hand to buy additional real estate and will have a safety net if the real estate market tanks.
- Revenue is decreasing. For any form of investment, this is a significant red flag. It’s easy to overlook a lousy quarter. A consistent drop in profits is usually something to avoid. They could be investing in depressed locations or property types that are losing favor, lowering their rental income. They could also be selling homes to pay down debt, resulting in lower rental revenue.
How do I choose a REIT?
Before investing in a REIT, as with any other investment, you should do your research. Before making a decision, there are a few clear signals to check for:
Management is number one.
It’s critical to comprehend and know the track record of the managers and their team before investing in a trust or managed pool of assets. Profitability and asset appreciation are inextricably linked to the manager’s ability to choose the best investments and methods. Make sure you understand the management team and their track record before investing in a REIT. Look into how they’re compensated. If it’s based on performance, it’s likely that they’re also looking out for your best interests.
Diversification is number two.
Real estate investment trusts (REITs) are trusts that invest in real estate. Because real estate markets vary by geography and property type, it’s critical that the REIT you choose is well-diversified. If your REIT has a lot of commercial real estate and occupancy rates drop, you’ll have a lot of troubles. Diversification also means that the trust has enough money to undertake future growth projects and leverage itself appropriately for higher returns.
3. Profits
The funds from operations and cash available for payout are the final factors to examine before investing in a REIT. These figures are significant because they reflect the REIT’s overall performance, which translates to money distributed to investors. Make sure you don’t use the REIT’s regular income numbers, as they will include any property depreciation and hence change the numbers. These figures are only useful if you’ve already scrutinized the other two indicators, as it’s possible that the REIT’s returns are abnormally high due to real estate market conditions or management’s investment luck.
How many REITs are there in Malaysia?
In Malaysia, how many REITs are there? As of October 2016, Malaysia had a total of 18 REITs. I currently possess three of these: Axis, IGB, and Sunway REIT.
Is investing in REIT a good idea?
As a result, in addition to cheap entry levels, REITs offer investors a safe and diversified portfolio with low risk and expert management, providing good returns on investment. REITs will be distinguished not only by their investment in real estate assets, but also by their restricted responsibility for all unitholders.
That’s not all, though. According to the criteria, finished projects must account for 80% of assets, while under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities account for 20%.
REITs allow investors to put their money into a diverse portfolio of commercial real estate assets. Investors who choose the direct investment path for commercial office spaces invest in a single office building.
Will REITs be able to provide the same returns on investment as’actual’ real estate investments? This is a question that small investors will be asking. No, that is not the case. Certainly, investors expecting for unreasonable profits (>20-30 percent) should go elsewhere. It’s critical to have realistic expectations for REIT returns. After adjusting for the fund management cost, a realistic ROI estimate would be in the range of 7-8 percent each year.
The return on investment (ROI) from REITs will be highly structured, realistic, and risk-averse. Investors who desire a regular income with no risk might consider REITs. Furthermore, REITs can provide investors with two types of income: capital gains from the selling of REIT units and dividend income. REITs will also be a good investment option for investors who want to diversify their portfolio beyond gold and the stock market.
REITs have already been introduced in India, and investors have seen excellent returns. The successful REIT listings in India have piqued investor interest in this new investment vehicle, and we expect more REIT listings to follow soon.
Is REIT dividend taxable in Malaysia?
Despite the fact that a REIT is exempt from tax if it distributes at least 90% of its total revenue during the year, the distribution to unit holders will be subject to withholding tax and will be received net of tax. Individuals are subject to a 10% withholding tax. This is a one-time tax, so unit owners do not need to report it on their personal tax returns.
Unitholders of REITs that distribute less than 90% of their total income are taxed.
REITs that distribute less than 90% of their total revenue will be taxed at a rate of 24%. In such circumstances, the REIT’s dividend to individual unit holders will include a portion of the tax credit, which can be used to offset the income tax owed on the REIT’s distribution.
Depending on the amount of income obtained during the year, the individual will be subject to tax at scale rates ranging from 0% to 30%, which they must declare in their yearly income tax filings.
Exempt income received and distributed by the REIT, such as single-tier dividends, certain types of interest, and gains from the sale of investments, will be tax exempt in the hands of unit holders.
On the basis of capital gains, unit holders who sell their units will not be taxed on the sale or redemption of their units.
SM Thanneermalai, managing director of Thannees Tax Consulting Services Sdn Bhd, contributed to this article.
CDS vs. nominee account
You must first open a Central Depository System (CDS) account before you may open a brokerage account with a Malaysian broker. You can trade stocks through your broker if you have a brokerage account. The ownership of Malaysian securities is recorded in a CDS account (i.e. stocks listed on Bursa Malaysia).
You could, for example, have a brokerage account with both Maybank and CIMB and buy Stock A through Maybank and Stock B through CIMB. You are identified as the direct owner of both stocks in your individual CDS account, despite the fact that you purchased two distinct equities through two different brokerages. As a shareholder, you have specific rights as the direct owner, including voting rights and the ability to attend AGMs/EGMs.
Malaysian brokerages will employ trust (nominee) accounts to acquire stocks on your behalf. As a Malaysian, for example, I can purchase Singapore Exchange (SGX) shares through my local brokerage, which will then place the shares in a nominee account for me. I am not the direct owner of the shares in Singapore because I do not have a CDP account (similar to a CDS account in Malaysia). In this situation, I am unable to vote or attend AGMs/EGMs for my Singapore stocks. However, as a shareholder, I will continue to have basic rights such as collecting dividends and the ability to subscribe to rights issues.
Foreigners who have a bank account in Malaysia are eligible to open a CDS account. It might be time-consuming for foreigners to open a bank account. In that instance, a nominee account is likely to be more practical. Nominee account holders may be charged additional fees by brokerage firms for managing dividends and other transactions. It’s a good idea to sort them out before you open one.
You can also learn more about the benefits and drawbacks of using a CDP vs a nominee account.
Market access
This is significant to me because I invest in both local (Bursa Malaysia) and international (SGX) stocks. As a result, I’ll need a brokerage that can handle both domestic and international stock transactions. Aside from Singapore, equities listed in Thailand, Hong Kong, Australia, Canada, and the United States may pique my attention. If you’re exclusively interested in Malaysian equities, though, a brokerage that focuses on the local market will suffice.
If you want to trade overseas stocks, these Singapore-based brokers can help you out because they provide more competitive prices in general. If you are not a Singaporean citizen or resident, a nominee account will be opened in your name. In addition to brokerage and custodian fees, you should be aware of the fees charged by corresponding or intermediary banks whenever you transfer money to your nominee account, as these can be substantial. For example, when you transfer money to FSMOne and Saxo Markets nominee accounts via telegraphic transfer, you would be charged S$20 and S$60, respectively, based on my personal experience.
Types of investment products
In general, the service offerings of all brokerage firms in Malaysia are more or less the same. On the Bursa Malaysia exchange, you can trade ordinary shares, preference shares, warrants, exchange traded funds (ETFs), exchange traded bonds and sukuk (ETBS), business trusts, stapled securities, and real estate investment trusts (REITs). (Here’s a list of the top Malaysian REITs that made money after their initial public offerings.)
Bursa Malaysia Derivatives, which is currently controlled by Bursa Malaysia, is in charge of commodity, stock, and financial derivatives trading, including futures and options.
Role of a stockbroker
Personally, I’m a long-term value investor who buys and collects solid stocks at low prices. What is the significance of this while selecting a stockbroker? Because I believe that deciding on a stockbroker should be preceded by determining your own investment goals and objectives.
A stockbroker’s role, in my opinion, is to assist me in completing the execution of my trades. It is not to provide me stock recommendations or buy/hold/sell suggestions for any stock at any time. This is significant because we must recognize that your stockbroker’s interests may differ from yours. Finally, you want a stockbroker who is focused on your investment goals. If he knows you’re a medium/long-term investor, he shouldn’t phone you with hot ideas that don’t assist you achieve your investing goals.
Offline/online access
I prefer internet access to offline access. It’s simple, convenient, and a lot less expensive. Trading platforms are now structured in such a way that even if you are not an IT expert, you can trade stocks with ease. Making a mistake is more difficult for you.
That being said, if you have any questions regarding any aspects on your brokerage’s trading platform, you may always contact your stockbroker through phone or WhatsApp. The goal is to locate a knowledgeable stockbroker or trade representative. I also prefer if a brokerage firm has a local office so that I can make a quick drive down if necessary.
Brokerage fees
Based on cash trading, the following is a list of Malaysian brokerage firms and their minimum transaction costs for trading Bursa Malaysia shares (non-margin). The amount of cash you deposit in your brokerage account determines the trading limit of these cash accounts. They are frequently less expensive than margin accounts in terms of brokerage fees. Margin finance is, in general, a two-edged sword and a dangerous technique that magnifies both profits and losses.
Why invest in REITs now?
Parts of the real estate industry may provide some protection against economic downturns. Even though the economy is still growing, the recovery from the pandemic is slowing, with investors worried about inflation risks and the chronic delta version of the coronavirus eroding and possibly reversing that progress. If cautious investors take defensive positions before economic cycles alter, they can be ahead of the game. Income-generating real estate investment trusts, which buy property, collect rent, and distribute at least 90% of their taxable income to shareholders, can be a good defensive investment. REITs are an excellent gauge for how REITs are performing since they produce consistent income through dividend payouts, which boost investment returns. Because their prices are unlikely to see substantial variations during an economic crisis, it’s preferable to concentrate on REITs in solid areas like storage, distribution, and data centers, as well as health care facilities. During more difficult economic circumstances, these seven REITs have the potential to offer favorable results.
Can you lose money in a REIT?
- REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
- One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
- Investors find it difficult to sell non-traded REITs because they have low liquidity.
- When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
