Finding the right time to invest in REITs
Investing in REITs may be good for your investment portfolio. You probably have to wait a bit to maximize your returns.
There are many things to like about REITs.
They give you a chance to invest in real estate without having to construct a building yourself or buy land. You get dividends year in and year out. These dividends grow as the company grows. Furthermore, you will only be taxed 10%, compared to 15% capital gains tax for stocks or 20% for government securities. For corporations who invest in REITs, dividends are tax-free.
REITs or real estate investment trusts are companies that own or manage real estate. They invest in various properties such as office buildings, malls, hotels, hospitals, warehouses, apartment buildings, etc. They are also mandated to give out most of their net income, at least 90%, as dividends to stockholders.
“These properties have something called the escalation rate,” said Emuel Olimpo, Merobank Investment Officer. He has been avidly studying REITs for Metrobank and its clients.
“The potential total revenue and the total dividends that REITs will be paying out will continue to grow. That is normally 5% to 10% growth every year per their contracts with their tenants,” he explained.
There are a few REITs you can choose from: Ayala REIT (AREIT), Double Dragon REIT (DDMP REIT), Filinvest REIT (FilREIT), Robinsons Land REIT (RL Commercial REIT), Citicore REIT (Citicore), and Megaworld REIT (MREIT).
REITs vs government securities
With all the benefits just mentioned, REITs seem to be an ideal investment. For Olimpo, however, any investment should always be compared to other comparable investment instruments.
He said government securities, which also provide steady income, are a good benchmark for anyone interested in investing in REITs. The difference, however, is that, unlike REITs, fixed income instruments such as government securities can’t give more than their original coupon rate throughout the term of the bond.
“Of course, if property rental rates go down, dividend payouts for REITs could also take a hit. But the current REITs all have best-in-class and premium properties that make them resilient,” he explained.
“If the dividend yield for a REIT is 6%, and fixed income or government securities offer 5%, then it’s a no-brainer. You choose REITs. Right now, however, dividend yields have fallen in line with fixed income,” said Olimpo.
Because government securities offer a safer alternative, Olimpo believes it’s best not to invest in REITs at this time, especially since the situation may not change in the next two years or so.
But still, for those who think long term, perhaps five years or 10 years, there’s definitely value in REITs.
“The most exciting thing about REITs is their property infusions,” said Olimpo. “Once we see those infusions happen, investors should be ready to capitalize on the opportunity.”
These property infusions occur when the parent company includes new properties in the REIT. For example, if a REIT starts out with some 200,000 square meters of real estate, it may later be injected with new properties to grow its portfolio, which will ultimately benefit investors because of more dividends.
It may not be the perfect time to invest in REITs right now, but for Olimpo, that chance to invest may come soon enough.
ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.