Over the last few weeks, I have had the opportunity to share with some friends and new acquaintances my experience on building a new stream of passive income for retirement via REITs (Real Estate Investment Trust). While I had blogged about this before, this topic is worthy to put down in writing here again. I hope I could provide this link to friends in the future, to encourage more people to take it up as part of their retirement planning. One should also read up on the many materials on the web first to get a better understanding before investing.
REIT stocks are well established in the developed countries and they have strict criteria which the trust has to follow in order to ensure that they qualify to maintain their REIT status.
Basically, they have 2 main rules to follow. (1) 90% of their net profit must be distributed as dividends, (2) while they have real estate assets in their portfolio, they are not allowed to borrow more than X% for financing (S’pore sets it at 45%).
Bottom line, REITS are relatively attractive investments because of the following:
- There are registered as a Trust utilizing a single purpose SPV (Special Purpose Vehicle) structure
- They hold actual assets (property as collateral)
- They are not overly leveraged due to the borrowing restriction
- The stock price movements are less volatile historically
- An investor gets regular dividends payouts (quarterly or semi-annually)
- There are many types of REITs in various sectors which an investor can choose from – hospitality, commercial, retail, retirement concepts, healthcare, country-specific etc
- If a REIT does actually fail, it is collateralized with real assets which can be sold off
S’pore has the most number of REITs in South East Asia, numbering about 30+. You can easily obtain summarized details from the newspapers or online (eg. reitdata.com). Current yields range from 5 to 9%, so they are pretty decent.
As a starting point, I will eliminate the highest yielding ones from my portfolio construction list as they will carry the highest risk (risk/reward ratio). I will then study the nature of each REIT to see what sector they are in, whether they have overseas exposure (which I try to avoid) and the type of property in their portfolio (by visiting their website).
For example, there are 2 shopping malls that I like – Clementi Mall and Suntec City. I frequent these places and I personally witness good human traffic with a healthy retail flow. I will zero in on the REITs that own them and add them into my preferred list.
Next, I will look at the historical candlestick charts (eg. using websites like investing.com). I will look for support and resistance trend lines to get a gauge of entry levels that I am comfortable with. Once that is decided, I place in my orders and the waiting game starts. Once my buy orders are triggered, I usually hold them for quite a while as I collect the periodic dividends which will lower my average even more over time.
Soon, my portfolio of REITs is built up. It consists of about 15+ ones that I like and have entered at technical levels I like. I try not to have more than $30k invested in each of them. On a quarterly or semi-annual basis, the DPU (Dividend Per Unit) is announced by the REIT and the proceeds will be credited directly to my account. I can get about a few thousand dollars each time. This is better than putting my cash in deposits that earn only a fraction of the REIT yields.
I have also been investing in REITs listed in the US. They have a much deeper market there and the REITs can even be created as a fund of funds concept. As I am very big into retirement villages and healthcare for the seniors, I mainly invest in the REITs that support this theme.
REITs are also attractive to Real Estate companies as they become vehicles for them to offload assets at a reasonable mid-price to a trust to manage more effectively, freeing up much-needed cashflows.
It is not easy to own a property in S’pore and there are many regulations and taxes involved, plus required holding periods. REITs provide another alternative for an investor to indirectly hold property assets which they like, without the administrative hassles and liquid stocks mean that they can easily be sold.
This is an ideal vehicle for a person to build up a portfolio with regular streams of income like a bond, but yet have the ability to participate in real estate assets with an acceptable level of risk. You just need to study them, then pick and choose the ones you like in order to build a basket of them to further diversify the risk.
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