For many, investing in real estate seems out of reach due to the high capital requirement to acquire and to maintain a property.
What newbie investors may not know is they can still add real estate to their investment portfolio without spending a fortune.
Real Estate Investment Trusts or REITs offer an affordable way to invest in real estate. Find out what a REIT is and how you can invest in it through this guide.
What are REITs?
REITs are corporations that own and operate income-generating real estate. They make money by collecting rent and other fees from tenants.
The assets include residential and commercial properties like malls, hotels condominiums, parking facilities, warehouses, factories, solar farms, and office spaces as well as infrastructure projects such as highways.
By investing in REITs, you become a part-owner of these portfolios of properties without the need to invest huge sums of money.
How do REITs work?
To understand how REITs work, here’s a quick overview of how one is established:
Step 1: A real estate company sponsors the creation of a REIT by providing and transferring income-generating real estate assets into the REIT corporation.
Step 2: The sponsor fulfills all requirements under the REIT Act (RA 9856) and files an application with the Philippine Stock Exchange (PSE) and Securities and Exchange Commission (SEC).
Step 3: If approved, the REIT can start selling its shares on the stock market via an Initial Public Offering. This is when individual investors can take part in the growth of a REIT.
By law, the REIT must sell at least a third of its outstanding capital stock to the public and reinvest the proceeds in the Philippines. The REIT Act also requires REITs to pay back 90% of their earnings to investors through dividends.
This gives investors the confidence that they will get 90% of the distributable income of a REIT via dividends, credited directly to their stock brokerage accounts quarterly.
How to invest in REITs
To earn from a REIT, you can buy shares during the IPO or from traders on the secondary market. There are brokerage platforms that allow you to purchase shares entirely online.
Step 1: Set up your trading account
Find an accredited brokerage firm and create your account. Your broker will ask for your consent to open a Name-on-Central Depository account, which is required to trade through the PSE.
To participate in an IPO, you can also open an account on PSE EASy. The PSE launched this online platform to make IPOs more accessible to individual investors.
Step 2: Assess the quality of REITs
Remember to do your research when choosing which REITs to buy. Here are some things to look at:
- Asset mix
What types of properties does the REIT have in its portfolio? Are they catering to growing industries? Is there high demand for such assets in their location?
These are some of the questions to ask if you want to know the quality of a REIT’s properties. The mix of properties will tell you the unique opportunities and risks each REIT may face.
- Dividend history
Find out the REIT’s history of paying dividends to know what you might expect to earn. Take note of any up- or downward trends as well as how it manages during hard times.
- Tenants
Check if the REIT’s properties have reputable tenants. The quality of tenants can affect the stability of a REIT’s income and therefore have an impact on your earnings.
Green flags include large companies that rent office or commercial spaces under long lease agreements.
- Opportunities for growth
Know the sponsor of the REIT you plan on purchasing. If the sponsor company has solid plans for expansion, it may be able to add more assets to the REIT’s portfolio over time.
Step 3: Buy shares of your chosen REIT
After doing your research and identifying the REIT/s you want to buy, it’s time to put your money to work. You can buy REITs during an IPO, which happens within a certain period.
If you missed out, you can still buy REITs secondhand just like other regular stocks listed on the PSE.
How can you make money from REITs?
There are two possible ways to grow your money from REITs. One is through dividend payouts and the other is by trading on the stock market.
1. Dividends
REITs are legally obligated to pay dividends to shareholders, unlike regular stocks that can choose not to. Dividends are usually paid out every quarter and may come in the form of cash, property, or stock dividends.
Since returns are predictable in terms of schedule, REITs are a good option if you’re investing to have a secondary source of income.
The amount you’ll receive, known as the dividend rate, will depend on how much the REIT earns.
2. Buying low and selling high
REITs are listed on the stock market and so the rules of capital appreciation apply. This means you’ll make a profit when you buy low and sell high.
If you don’t need the cash right away, it may be better to hold on to your shares and benefit from potential long-term growth.
What are the advantages and disadvantages of investing in REITs?
To know if REITs belong in your portfolio, check if their features match your risk tolerance, goals, and time horizon. Here are the pros and cons of investing in REITs to help you decide:
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Through REITs, investing in real estate is no longer a rare opportunity reserved for a few. The public can now take advantage of an asset class that makes real estate more accessible.
