In the last year or so, there has been a new breed of real estate companies cropping up on the Philippine Stock Exchange (PSE). Real Estate Investment Trusts or REITs, are companies that invest in income-generating properties and distribute their earnings back to shareholders in the form of dividends. But what opportunities do REITs offer to the regular investor? As we’ll see, REITs offer a way to invest in real estate without the hassle of managing properties yourself.
REITs are focused on purchasing and managing income-generating assets like offices and commercial properties. This makes them different from most property companies that usually focus on real estate development and get their money through sales. A REIT’s objective is to maximize rental income from its owned properties and distribute this income to shareholders in the form of dividends.
Although new to the Philippines, REITs have been around in developed markets such the US, Europe, and Australia for decades.
So what do people like about them? Dividends are the primary appeal. According to Philippine law, 90 percent of earnings must be distributed to shareholders. That means if you own shares in a REIT, you can be sure that the vast majority of profits will go to you and other shareholders through regular dividend payments.
There is also the benefit of capital appreciation. Philippine REITs are traded on the Philippine Stock Exchange so their share prices rise and fall just like any other stock. In the case of AREIT Inc. by Ayala Land, the Philippines’ first REIT, today’s share price is up by more than 50 percent from its launch price of P27. The concept of buying low and selling high applies to REITs too, which could potentially reap additional gains for investors.
Another appeal is its accessibility. Just as stocks offer a way to buy a piece of a company, purchasing a REIT allows you to buy into its portfolio of real estate assets for the price of a few shares. Compare that with the substantial investment required to buy and maintain a single property like a house or condominium unit. And unlike physical properties which can be hard to sell given market conditions, REITs are liquid – meaning that shares can easily be converted to cash by simply selling them on the stock market.
REITs also help investors diversify their assets as they are tied to tangible income-generating properties often spread across different property types and geographies. We also know from performance in other countries that REITs have a relatively low correlation with the global stock market movements compared to other asset classes so they could offer some stability to your portfolio when markets go sour.
So how are Philippine REITs doing? AREIT Inc., which invests in Ayala Land developed office buildings, achieved a dividend yield (dividends per share divided by price per share) of around five percent in its first full year. Since then, competing REITs by developers such as Filinvest Land, DoubleDragon Properties, and Megaworld have launched at various prices with most projecting a dividend yield of six percent or greater, but their actual full year performance has yet to be seen.
For all their benefits, REITs also come with their own set of risks. Because they are so tied to a specific set of properties, it’s important to assess how a company chooses its portfolio and manages its assets as this will determine its long-term success. For instance, which REITs are tied to property types and regions that have a high potential for growth? How good is property management at maintaining assets and maximizing occupancy?
Ultimately, REITs that take care of their real estate portfolio will attract more tenants, which in turn increases rental income. Likewise, companies that place an emphasis on sustainability and technological innovation in their properties will be the best candidates for REIT investors.
So should you invest in REITs? While before, investing in real estate usually required investors to make big investments into physical properties, REITs present us with the opportunity to invest in real estate at a much smaller and manageable scale than before.
For investors that want to diversify their investment portfolios and create a steady stream of dividend income at a low start-up cost, allocating a portion of investments to REITs could reap handsome long-term rewards.