All You Need to Know about Real Estate Investment Trusts (REITs)31 May 2022
Purchasing real estate may be one of the sure signs of adulting in the Philippines. It may be a right of passage for some young professionals, but did you know that there’s more to real estate than just a means of “settling down”? Discover Real Estate Investment Trust (REIT) and how it can help make your future bright.
What is a Real Estate Investment Trust?
A real estate investment trust, or also called REIT, is an institution that owns, oversees, or finances income-generating real estate. It is said to be one of the emerging alternatives for small investors who want to make money in real estate.
Based on the Real Estate Investment Act of 2009, a REIT is a stock corporation developed as specified by the Corporation Code of the Philippines and the regulations promulgated by the Securities and Exchange Commission (SEC) primarily for owning income-generating real estate assets.
By the name itself, it deals with investments made in real estate. However, what’s unique to most REITs is that even as a working Filipino citizen, you can invest your hard-earned money and benefit from valuable real estate. You do not need vast amounts of money to try your hand at REITs. Should you invest, you will have the opportunity to receive dividend-based income and total returns of the taxable income of the REIT firms you have invested in.
Patterned after mutual funds, these real estate investment trusts will allow you to expand your investment portfolio because you get to allocate your money to a variety of properties such as apartments, office buildings, warehouses, malls, hotels, and even condos and even a residential house and lot.
With REITs, you can invest the same way as in other industries. You can purchase an individual property stock or you can purchase through the exchange-traded fund, or better known as mutual funds.
What makes REITs attractive to stockholders? Its unique advantage you can engage in public trading-like behavior, just as in stocks. You can earn and own stocks and properties minus the intricate process of buying properties.
With your help, several real estate properties can be developed and, as a result, can help communities grow, create livelihood, and generate income on their own.
Types of Real Estate Investment Trusts (REITs)
1. Equity REITs
This type of REIT is most common, as they are mostly publicly-traded REIT. They usually own and manage income-producing real estate. You earn money when rents are collected, not by reselling the property.
What sets them apart from the property companies here in the Philippines is these Real Estate Investment Trust companies focus on purchasing and managing real estate properties instead of developing real estate properties and getting their money through sales.
When you choose to invest in equity REITs, your objective is to maximize rental income from its owned properties and distribute this income to shareholders in the form of shareholders' dividends.
2. Mortgage REITs
Another type of REITs you can choose to invest in is the Mortgage REIT. With this type of REITs, you help individuals to acquire properties by financing their purchases via mortgage-backed securities.
Also called real estate investment trusts, mortgage REITs provide a critical function in the economy through the facilitation of the housing market. You can offer the convenience of liquidity in the industry.
With mortgages financing real property, you can give borrowers the means to purchase residential properties or fund real estate acquisition opportunities.
How will you earn, you ask? Your real estate derive can come from net interest margin. Net interest margin is calculated by the interest earned on mortgage loans and the cost of funding these loans. However, this model can make you potentially sensitive to interest rate increases.
3. Hybrid REITs
Want to benefit from the best of both worlds? Then you’re definitely for this third REIT type. Called the Hybrid REIT, you can adopt the investment strategies of both equity and mortgage REITs. If you want to have a diverse source of REIT dividends, then Hybrid REIT is best for you.
What are the Disadvantages of a Real Estate Investment Trust?
Similar to any investment, REITs also have risks. Before you start investing in REITs, consider the following so you will have a realistic expectation of the returns you’ll reap.
Similar to investing in stocks, you must be prepared for fluctuating values and prices that may occur from time to time. There are several factors that affect their value, including political instability, economic recession, and even damage to property caused by natural calamities that can affect the standing of the real estate market.
Just as current events affect the value of your stock, the value of private and commercial real estate also gets affected. If the rental demand for its properties drops, so do the REIT’s income and the dividends you will get.
An example of this is when the COVID-19 pandemic happened. Due to the companies enforcing work-from-home setups in their employees, the real estate industry suffered from a loss of revenue. This is because the IT-BPO industry is one of the biggest sources of real estate sales handled by REIT companies.
Own Real Estate
Some REITs own only the apartment buildings or office buildings but not the land on which they’re built. Hence, REIT Investors of such properties lose the opportunity of getting their REIT total return performance from the appreciation of the land’s value.
Before investing in a supposed REIT company, it also pays to check its their legitimacy with the Securities and Exchange Commission so you would not be a victim of any scam.
Is a REIT a good investment?
Now that you are mindful of the risk, it’s time to discover the perks of investing in REITs. Here are eight reasons why REIT is a good investment.
1. Regular earnings through dividends
Under the REIT Act of 2009, REITs must pay at least 90% of their distributable annual taxable income as dividends to their shareholders.
They are mandated by the law to give you returns, as opposed to property stocks where it is the companies who can decide whether they will release their shareholder dividends. As a result, most REITs are often exempt from corporate income tax.
2. High Liquidity
This is especially true for equity REITs. When you need cash, you can easily sell REITs on the Philippine Stock Exchange (PSE). You don’t need to stress about looking for buyers and other legalities entailed when you sell real estate properties. With REITs, you have easy access to your investment funds.
3. Diversified Assets
With REITs, you can diversify the real estate property types you own. Among the income-generating assets you may have aside from office and residential properties are retail properties such as shopping malls, retail shops, hospital properties such as hotels and resorts, and even healthcare properties such as hospitals, clinics, and nursing homes.
4. Capital Appreciation
Because you’re investing in real estate, chances are, the value of those properties will also increase. So when at times you see that REIT shares are at low prices, you can purchase them, and afterwards sell them at a higher price later. This way, your earning potential for REITs also grows.
5. Low-price Entry
Perhaps the biggest question for those curious is how much seed money should I have to finance Real Estate Investment Trust? It depends on the status of the value of the REITs in whom you choose to invest.
6. Easy Way to Invest
If you’re a newbie in real property investments, then this can be a good way to improve your portfolio. You don’t need to go through the many legal tangles of transferring ownership of properties which can be tedious and time-consuming.
When you try your hand investing in REITS, particularly publicly traded equity REITs, then you will see how it is easy to grow your investment. You simply have to buy and sell REIT shares in the stock market as you would normally do with regular stocks.
However, there are private REITs that only a select few can avail of as they are not registered with the SEC and don't trade on PSE. Usually, these REITs can be sold only to institutional investors.
Because most REITs are PSE-listed companies, they are required to be transparent with their company information. Hence, you can now take a break knowing that the financial standing, share price, investment strategy, and stock information of shareholders can be accessed, should you need it.
8. Professional Fund Management
Similar to stocks, you can also have your own REIT investment advisor. The said professional fund manager will be responsible for how your funds move and your REIT shares grow. You can work with them to determine which quality real estate assets will benefit you.
Real Estate Investment Trust: Source of Passive Income
With all the details you have learned about REITs, are you ready to start your investment journey? Then when you want to diversify your income sources, and you have purchased enough REIT shares, you can invest in another form of actual real estate investment.
Start by purchasing a residential house and lot from any Lumina Homes found all over the Philippines.
Try Lumina Homes' loan calculator and get an estimate computation for your preferred Lumina property and home model.