The Complete Guide to REITs in Malaysia

Real Estate Investment Trust (REIT)

I’m sure most of you have, at some point in your investing journey heard of a REIT. REITs are a type of security that invests in real estate and are often listed publicly on stock exchanges. REITs in Malaysia and around the world receive special tax considerations and usually offer higher dividend yields compared to other companies.

The first REIT was created in the United States back in 1960, giving investors the opportunity to invest in huge real estates. The first REIT formed in Malaysia is Axis REIT all the way back in 2004, a good 44 years after our friends in the USA. From here on out,we will be discussing REITs in Malaysia.

What are REITs?

REITs in Malaysia

REITs are all around us, in fact, one could even say that almost every Malaysian has been in contact with a REIT in one form of another. You’ve surely walked into shopping malls, office buildings, hotels, factories warehouses.  Well, lo and behold! REITs own and manage these properties.

Recall your favorite malls from your younger days: Mid Valley and Sunway Pyramid, they belong to IGB REIT and Sunway REIT respectively and have been solid performers in my Freedom Fund.

When explaining what are REITs to people, I like to compare them to mutual funds. The beauty of a REIT is that it allows small time investors like us to acquire and own a slice of the pie in an otherwise impossibly expensive piece of real estate.

In my humble opinion, REITs are a very underrated security in Malaysia. They are perfect for beginners due to their low risk nature as well as high dividend yield. Further advantages of Malaysian REITs will be discussed below.

How do I invest in REITs in Malaysia?

I know, some of you are wondering would I even bother including this in the article let alone making this a header. You’d be surprised how many times I’m asked this question, most Malaysians aren’t even aware that REITs are listed on our stock exchange. Yes! You can own real estate through Bursa Malaysia.

For all intents and purposes and to make things simple for all, REITs are shares. You buy REITs exactly like how you purchase shares. I hope no one asks me how they can go about buying REITs anymore from now on. If anyone asks, please just direct them to this page.

REITs in Malaysia

Tax Advantages of REITs in Malaysia

The Malaysian government has constantly been introducing tax incentives to promote REITs in the capital market. One huge tax benefit of a REIT is that most income earned by it is exempted from income tax. As long as REITs in Malaysia distributes at least 90% of its current year taxable income, the REIT will not be levied the a 25% income tax. This allows the REIT to distribute its income on a gross basis. With this tax system, most Malaysian REITs (if not all) always distributes at least 90% of its taxable income, coupled with the absence of a 25% income tax, dividend payments from REITs are always expected to be well above other corporations.

However, as REITs are publicly listed companies, investors can range from your average local investors to foreigners and foreign entities. Malaysia’s taxman will be hard-pressed to keeping track on tax payments by all these investors, hence you may notice that REITs charge a withholding tax on their dividends. Although Malaysia’s withholding tax rate is considered one of the lowest in the world, we are still behind a few countries – mainly our neighbour Singapore.

Another huge advantage of Malaysian REITs is the exemption of tax on the moving of properties. When a Malaysian REIT acquires properties, it doesn’t have to fork out for stamp duties, normally fixed at a maximum of 3% of the purchase price. When REITs in Malaysia dispose of their assets, they do not have to pay real properties gain tax (RPGT) as well. Imagine the amount of savings REITs are afforded, I’m sure you can come up with your own calculations.

I’ve written an extended article on the tax treatment on Malaysian REITs HERE for further information.

How many REITs are there in Malaysia?

There are a total of 18 REITs in Malaysia as of October 2016. Of these, I currently own 3 – Axis, IGB and Sunway REIT.

REITs in Malaysia

REITPortfolioStock Short Name
Amanah Harta Tanah PNBRetail, OfficeAHP
Al-Aqar Healthcare REITHealthcare, HotelsALAQAR
Al-Salam REITOffice, IndustrialALSREIT
AmFirst REITOffice, Retail, HotelsAMFIRST
Amanah Raya REITIndustrial, Office, Hotel, RetailARREIT
Atrium REITIndustrial, Warehouse, OfficeATRIUM
Axis REITIndustrial, Office, WarehouseAXREIT
Capital Malls Malaysia TrustRetailCMMT
Hektar REITRetailHEKTAR
IGB REITRetail, HotelsIGBREIT
KLCC REITRetail, OfficeKLCC
Pavillion REITRetail, OfficePAVREIT
Quill Capita TrustCommercial, Carparks, Office, IndustrialQCAPITA
Starhill REITCommercialSTAREIT
Sunway REITRetail, Hotels, OfficeSUNREIT
Tower REITOfficeTWRREIT
UOA REITOfficeUOAREIT
YTL Hospitality REITHotelsYTLREIT

Why Invest in Malaysian REITs?

Let’s compare REITs to other corporations on the stock market as well as physical properties.

1. 90% Distribution = Huge Dividends

As mentioned earlier, in order to take advantage of the tax system, REITs will almost always distribute at least 90% of its earnings. That’s right, 90% of all rentals collected from all those colossal buildings will be distributed to shareholders. The savings on stamp duty and RPGT alone run into the millions, those savings will eventually be transformed into dividends for investors like us.

More often than not, the dividends distributed by REITs in Malaysia will be higher compared to other corporations. Which is why I always see REITs as more of a defensive stock due to it investments in physical properties and its high dividend yield.

2. Diversification

There are so many ways REITs offer diversification for your portfolio. For example, just by investing in Sunway REIT, your funds are already spread out among several properties types and also geographically. Your funds are invested in malls, hotels, offices across several states in Malaysia.

If you were to purchase a physical property by yourself, at most, due to the constraint of time and availability of funds, you’d have 3-4 properties in your portfolio. Which sounds better?

3. Low Initial Investment

With as little as RM1,000 you can add shopping malls, office towers, industrial warehouses and even hotels to your real estate empire. Although I mention RM1K, please note that ideally, you’d want to start off with at least RM3K, with RM7-8K being the most ideal due to brokerage fees. Read more on it here on How to Start Investing.

4. Liquidity

Compared to a physical property, you’re able to buy and sell shares in Malaysian REITs in a few minutes. I cannot emphasize this enough, think of the hassle you have to go through just to sell an apartment unit now. The lawyers, agents, potential buyers, it’ll be at least a few weeks before you’re able to rid yourself of that apartment unit.

Whenever you find yourself in a pickle and you need cash fast, you will realize how important liquidity is. Emergencies aside, liquidity will save you a huge amount of time when disposing of REITs not to mention the fees.

5. Let the Professionals take care of it

Malaysian REITs
Leong Kit May – CEO of Axis REIT (one of my most respected REIT CEO)

Just lay back and let the actual real estate experts handle and manage your properties. Who do you think owners of a RM1 billion shopping mall like Mid Valley and the Gardens will hire to manage their properties? The managers will of course be the very best in the field and have tons of experience. With expertise like that on your side, you leave the acquisitions, the disposals and the management of your properties to true professionals.

Conclusion

I hope I’ve been able to shed some light on REITs in Malaysia. I am not against anyone purchasing a physical property on their own. Instead, one should always make their decisions based one as much information as possible and I believe REITs are a very viable and lucrative option in Malaysia.

REITsPhysical Property
Dividend yield: 5 - 7%Rental yield: 3-5%
LiquidIlliquid
Low transaction costs, doesn't take up timeHigh transaction costs, time consuming
Managed by expertsSelf-managed mostly
Highly diversifiedVery little chance at diversification

Physical properties are so hyped in the recent years because you have every tom, dick and harry bragging about how they earned RM100K or RM1 million by buying and selling properties. Yes, this may be true but why? Well, because you are actually borrowing 90% from the bank to finance that deal, you could earn that same amount with stocks if any banks were crazy enough to lend you that same amount.

However, at the end of the day, REITs are a form of investments and has its own risks. They are susceptible to all forms of market risks and you should conduct your due diligence before making a decision. REITs are a defensive stock and are less volatile compared to other stocks. I love them due to their high dividend yield and REITs will continue to be a big part of my portfolio.

As it has always been my mantra, I say – To each his own. Invest in what you know and what you feel comfortable in. If it is properties, by all means, invest and plough your trade in the property market. However, for the rest of you, please give REITs your consideration the next time you are making an investment decision. I have been advising my clients to invest in REITs for years now and there has been no regrets.

REITs make up a huge proportion of my Freedom Fund and are my dividend cash cows. May they provide for you as they have for me. Looking for a more general guide to stock investment? Head over to my article on A Guide to Stock Investment in Malaysia.

What are the REITs you’ve invested in?

Let me know if I’ve missed out anything important on Malaysian REITs. I will be continuously updating this page when I come across any relevant information so don’t forget to subscribe to the site, bookmark this page and check back often.

As always, thank you for reading!

 

My Real Estate Portfolio

Real Estate I Currently Own

It is not in my nature to write about things I do not own or understand. Unlike most ‘experts’ out there who preach and sell products that they themselves would not invest in. So, full disclosure here, apart from my investments in the stock market, my humble real estate portfolio consists of 2 low-cost rental apartment units in Kuala Lumpur.

A brief summary on my properties:

  • I’ve managed to secure stand-up tenants;
  • Both properties are financed by banks; and
  • Both properties are held under a Sdn Bhd I own.

Property A:

Real Estate - Property A

  • RM224 a month positive cash flow translating to an ROI of 17.74% p.a. (I’ve factored in the relevant maintenance costs etc);
  • Appreciated roughly RM25K in value as at March 2016;
  • I bought Property A through an auction about a year and a half ago, I managed to gain access to the property and rented it out for almost a year before I started paying my loan (will have a separate article on how I did it soon);
  • Currently tenanted at RM700 per month.

Property B:

Real Estate - Property B

  • RM183 a month positive cash flow translating to an ROI of 8.08% p.a. (I’ve factored in the relevant maintenance costs etc);
  • Appreciated roughly RM20K in value as at March 2016;
  • I bought Property B through as a subsale unit;
  • Currently tenanted at RM750 per month.

So, why real estate? I was hesitant to invest in real estate because I knew it would take up a lot of my time and effort to maintain a rental property. What made me take the plunge was the leverage I was able to get from banks to invest in real estate. Essentially, I only needed to put up 10% of my own money for the property and the bank would fork out the remaining 90%. This would have been impossible for stocks, even margin accounts don’t give you that much leverage for your money.

I decided from the start that the properties I own will have to be close to where I live to facilitate monthly inspections and the likes. I also made sure that I would be able to get a surplus income after deducting all related expenses. Which is why I ended up with low cost apartments because only those made financial sense to me.

1. Cash flow, cash flow, cash flow!

Cash flow is the extra profit left over after all of the expenses have been paid on a property. Using my properties as an example, my rental properties produced RM1,450 in income and my estimated expenses came to RM1,050, this would leave me with a positive cash flow of RM400 per month.

Now, I know a lot of you are saying, “Four hundred dollars is not going to make me a millionaire.”

Probably not. But remember, we are just talking about one of my asset classes.

Additionally, that RM300 might be from just one property. If I owned ten similar units with the same cash flow, that’s RM3,000 per month. If I owned 100 units, that’s RM30,000 per month. This cash flow can go a long way toward helping you quit your job — or helping you save for a future big purchase, or retire wealthier.

2. Appreciation

When I talk about appreciation, I am not referring to how much I like you (though I do appreciate you!). I’m in fact referring to the rise in value that real estate experiences. For example, if you purchased a property for RM200,000 ten years ago, and today that property is worth RM300,000, the appreciation made you RM100,000 richer!

Of course, appreciation doesn’t cause values to increase every year (consider the U.S.’ housing market in 2007!). However, historically, real estate prices have appreciated over the long term. So, again, appreciation alone is not likely going to make you a millionaire, which is why I don’t recommend that people purchase bad deals hoping that appreciation bails of them out.

It has never made sense to me when people purchase properties in the hopes of the making capital gains on it while servicing their mortgages every single month. Just like how I am acquiring shares with awesome dividends, I buy my properties that provide me with essentially the same thing – postitive cash flow. That way, my tenants will help me service my mortgage and I receive the remaining dollars.

3. Tax deductions

Finally, one of the more overlooked parts of real estate investment.

Back in 2014 I incorporated a Sdn Bhd for as a holding company for my investments and decided that the way forward for my real estate portfolio was to park them all under the company.

Although I had initially planned to only park my commercial properties under a Sdn Bhd, I realised that the low cost apartments will always be investment properties for me. (A side note: please do consult your solicitors or counsels on the pros and cons of placing your real estate under a Sdn Bhd before you attempt it.) I will have a comprehensive article on why I chose to have my properties all registered under my company in the future.

Putting it all together

So far, my main source of passive income comes from my Freedom Fund‘s dividends, earning me a total of RM7,544.14 last year. My real estate portfolio should earn my about RM4.9K per annum this year. I hope to snap up a medium cost apartment or a commercial property in the future and bring my annual real estate income up to RM10K p.a. in the foreseeable future.

Instead of a physical property, some of you may be interested in investing in Real Estate Investment Trusts (REITs) in the stock market. You are able to get access to large real estate including shopping malls, office towers as well as hotel chains through REITs. Learn more about them here in my Complete Guide to REITs in Malaysia.