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 are all around us, in fact, one could even say that almost every Malaysian has been in contact with a REIT in one form or 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.
REITs are a very underrated security in Malaysia. Though they have been gaining traction for the past few years as a good defensive stock for every portfolio.
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?
Why would I even bother including this in the article? 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. To invest in shares (and therefore REITs), you can learn about share investing hERE.
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 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) 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 shares.
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.
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 its investments in physical properties and its high dividend yield.
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.
You can compare Malaysian brokerages and their fee structures hERE.
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
Just lay back and let the actual real estate experts handle and manage your properties. Who do you think owners of an 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.
With professionals handling the day-to-day, your dividends from REITs are true passive income.
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
|REIT||Portfolio||Stock Short Name|
|Amanah Harta Tanah PNB||Retail, Office||AHP|
|Al-Aqar Healthcare REIT||Healthcare, Hotels||ALAQAR|
|Al-Salam REIT||Office, Industrial||ALSREIT|
|AmFirst REIT||Office, Retail, Hotels||AMFIRST|
|Amanah Raya REIT||Industrial, Office, Hotel, Retail||ARREIT|
|Atrium REIT||Industrial, Warehouse, Office||ATRIUM|
|Axis REIT||Industrial, Office, Warehouse||AXREIT|
|Capital Malls Malaysia Trust||Retail||CMMT|
|IGB REIT||Retail, Hotels||IGBREIT|
|KLCC REIT||Retail, Office||KLCC|
|Pavillion REIT||Retail, Office||PAVREIT|
|Quill Capita Trust||Commercial, Carparks, Office, Industrial||QCAPITA|
|Sunway REIT||Retail, Hotels, Office||SUNREIT|
|YTL Hospitality REIT||Hotels||YTLREIT|
My Investment in Malaysian REITs
I currently own 3 REITs in my portfolio. Axis REIT, IGB REIT and Sunway REIT.
Their performance in 2018 for me personally are as follows:
1. Axis REIT
Dividends (2018) – RM1,359.45
Dividend Yield (2018) – 3.96%
Axis REIT has been deteriorating since 2017 with yields dropping from 4.72% to 3.96%.
2. IGB REIT
Dividends (2018) – RM2,865.43
Dividend Yield (2018) – 7.09%
Huge jump in yields from 4.42% in 2017 to 7.09% in 2018.
3. Sunway REIT
Dividends (2018) – RM1,179.94
Dividend Yield (2018) – 5.95%
Steady dividend yield from SunREIT. Decreasing slightly from 6.07% in 2017.
Among the 3 REITs I’ve invested in, clearly, IGBREIT has been the best performer. I’m satisfied with SunREIT’s yields for the past few years as well.
As for Axis REIT, I’ve been considering reducing my holdings there and reinvest in other more productive REITs in 2019.
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?
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 option in Malaysia.
|Dividend yield: 5 - 7%||Rental yield: 3-5%|
|Low transaction costs, doesn't take up time||High transaction costs, time consuming|
|Managed by experts||Self-managed mostly|
|Highly diversified||Very little chance at diversification|
Physical properties are so hyped in 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.
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 have been no regrets.
I’d suggest taking a look at my Basic Financial Plan I drafted for everyone. You’ll need to have a proper plan to adhere to if you’re to start investing. It’s free and it’s hERE.
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.
For the next article of the Investing Series, check out article 003 – Malaysia Stock Brokers Comparison.