Basics     Explainers

REITs and ETFs (Part 1)

POSTED ON DECEMBER 04, 2020     Andoy Beltran

This is the first article in a two-part series on 2 new asset classes available locally.

 

You can read Part 2 by clicking here.

 

Allow me to share with you things you need to know about 2 of the newest, legitimate asset classes in the Philippines–Real Estate Investment Trust or REITs, and Exchange-Traded Funds or ETFs.

 

REITs

Real Estate Investment Trusts are an easy, affordable and convenient way to invest in commercial real estate and earn income. Each REIT is a company that owns, and in most cases operates, income-producing real estate. They can be publicly registered but non-listed, private, or publicly traded on major exchanges.

 

In 2009, the Philippines came up with R.A. 9856 or the REIT Act of 2009 which was designed to enable real estate firms to place their assets in stock corporations where the public can invest in by purchasing shares in these businesses. Despite the act being drafted more than a decade ago, it was only until late last year that a company took interest in listing a company as a REIT here in the Philippines.

 

REITs invest in office buildings, shopping malls, condominiums, hotels, parking lots, hospitals, and other rent-revenue generating real estate assets.

 

People should consider investing in REITs simply because they take away all the troubles one has to go through in order to enjoy the benefits of investing in real estate.

 

Imagine OFWs investing in real estate in the Philippines without having to fly back and forth just to administer their properties. An investor in Cebu can buy properties in Manila without having to visit from time to time to take care of transactions, supervise construction, or deal with tenants.

 

Traditional real estate investing requires large capital. Even if you have the funds, you will still need to the know-how to start and operate the business to sow returns from your investment.

 

Like any business, although lower, risks are still inevitable. Purchasing a property and developing it is one thing, but there are still no guarantees that it will flourish.

Some people who don’t have the capital will go through intermediaries such as banks in order to be able to afford the investment. True enough, this will enable you to purchase the property but at an additional cost and it may further delay your gratification.

 

Many think that a real estate investment is guaranteed and will be all cozy once they’ve recovered all their costs. Despite the recurring income from these investments, we also have to know that these also come with recurring expenses. These expenses come in the form of insurance, taxes, monthly dues, repairs, maintenance – all of which are unavoidable if we want to our real estate investments to continue bearing fruit.

 

Due to the high barrier to entry, diversifying your real estate portfolio may not be as easy. Owning one real estate asset, for some, is a once-in-a-lifetime opportunity.

 

The point of investing in real estate is to have a steady source of recurring income. However, should worse come to worst, it would be good to know we can dispose of our assets and convert it immediately to cash in hopes of being able to remedy our current situation – which may not always be the case with real estate.

 

The tedious process of marketing a property, the painstaking process of negotiations and processing of documents can sometimes be more of a burden than a solution to the problem.

 

Advantages of investing in a REIT:

  • Minimal capital requirement–No need to have millions for you to be able acquire ownership of prime real estate properties. Which means, it’s affordable!
  • Instant diversification–You’re not limited to one type of property only, it could be more (like a mixture of office buildings, hotels, apartments, etc.) depending on the properties that were acquired/purchased to form part of the REIT.
  • Professional management.
  • Dividends–Did you know that 90% of the rental revenues from the properties under a REIT will be given back to the shareholders in the form of dividends? Yes, they are required to declare annual dividends.
  • Liquidity–You can trade it through the exchange since you are holding shares of stock; Not difficult to find buyers/ sellers

You’ll be a proud part-owner of prime properties but instead of a large capital outlay, you are investing in real estate properties for less!

 

Read Part 2 here.

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