Why REITS deserve a place in your portfolio
Real Estate Investment Trusts or REITs in short were established as an asset class in the US in the 1960s to provide investors a platform to invest in income producing real estate without directly owning the real estate. The asset class was introduced in Singapore in 2002 with the listing of CapitaLand Mall Trust. Since then, many more REITs were listed both in Singapore and the region and the asset class is widely accepted as a staple for investors looking for income.
REITs offer income investors a few benefits to other income producing assets. REITs are generally granted tax benefits where the distribution is tax exempt if the REIT pays out the bulk of their income, typically 90%, to unitholders. REITs also offer more liquidity to directly buying into real estate, where you can easily liquidate your holdings in the capital markets. In this article, I highlight 3 reasons why REITs deserve a place in your financial portfolio.
"With the reopening of travel and tourism, I think REITs are well positioned to benefit from the economic reopening."
1. Time to Shine
REITs has been a lagging asset class for the past 2 years. The covid pandemic has brought about uncertainty in the hospitality and retail sectors and the past performance of REITs generally reflect the pessimism surrounding the sectors during the pandemic.
Things are starting to change in the past couple of months. With the exception of China, most of the Asian economies are starting to open up their borders to travelers. I see this trend of reopening continuing in the coming months, barring any deadly mutations to the covid virus. With the reopening of travel and tourism, I think REITs are well positioned to benefit from the economic reopening.
2. Alternative to Bonds
Global economies are generally tightening their monetary policies and increasing interest rates to combat rising inflation. Bonds, which are another income producing asset class, tend to have an inverse correlation to interest rates. When interest rates rise, bond valuations tend to fall. This makes bond investing less attractive for income investors in the near term where interest rates are likely to rise.
I think comparatively, REITs are better positioned as an income producing asset. While REITs may also be affected by rising interest rates, given most REITs hold substantial debt in their balance sheet, interest expense may increase in the coming years. REITs can pass on some of the interest costs to their tenants by increasing rental rates and thereby offsetting some of the costs associated with rising interest rates.
REITs as an asset class offer instant diversification. When you are buying into a REIT, you are effectively buying into multiple properties within the REIT. This diversification lowers the risks of investing into real estate where you are less susceptible to vacancy risks and other risks of buying into a single real estate.
Besides the diversification that REIT offers, buying into a REIT fund or Exchange Traded Fund (ETF) offers greater diversification of country and sectoral diversification while granting you access into the asset class and the income produced from the underlying assets.
I think REITs as an asset class offers investors some opportunities to tap into the reopening from the covid pandemic. It is not without its risks, as REITs do come with volatility associated with the financial markets. If you like to explore opportunities within the REIT sector, but are unsure where to start, do seek advise from a qualified professional.