A REAL estate investment trust (REIT) is a special investment vehicle that hold properties (office buildings, malls, apartments, hotels, resorts, warehouses or storage facilities) and distribute 90 per cent of its income to unitholders.
Historically, REITs generate an average return of between six and eight per cent per annum, higher than bank’s fixed deposit rates.
Because REITs offer more and the units are relatively easy to buy and sell, they are an attractive prospect to many.
Financial adviser iFAST Research Team said first-time investors should start off by comparing dividend yields offered by a particular REIT with yields from an alternative investment, and how much of a spread it provides for compensation with the incremental risks associated with the REIT investment.
Investors should also look into the consistency of the REITs dividend payments, which may be affected by the types of property a particular REIT invests in.
As such, investors must look at the source of income and property portfolio that a REIT has prior to investing in one.
The research team said other key characteristics that investors should look for are:
LOOK for an experienced management team that has a proven track record. A sound management team will be able to add value to the REIT’s portfolio through recognising opportunities to acquire more quality assets to enhance income stream, along with strategies to maintain and improve occupancy rates.
ECONOMIES of scale exist. REITs that have larger asset bases or those that pay out larger dividends show lower average costs than REITs with smaller asset bases or smaller total dividends. Larger REITs may achieve a level of market power that results in external cost economies (financing or management contracts) that are unavailable to less capitalised REITs.
A LOW debt level is generally more attractive. Historically, highly levered REITs have performed worse on average than low levered REITs.