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Saturday, 27 February 2010

Passive Income From REIT?

Heard some active discussions on REIT at Bullythebear's cbox and my mouth also becomes itchy and need to :cookie:

From Wikipedia

What is REIT? 

A Real Estate Investment Trust or REIT is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes.

In Singapore, it is commonly referred to as S-REITs. There are currently 20 REITs listed on the SGX, starting with CapitaMall Trust [6] in July 2002. They represent a range of property sectors including retail, office, industrial, hospitality and residential. S-REITs hold a variety of properties in countries including Japan, China, Indonesia and Hong Kong, in addition to local properties.[citation needed]

S-REITs are regulated as Collective Investment Schemes under the Monetary Authority of Singapore's Code on Collective Investment Schemes or alternatively as Business Trusts.

S-REITs benefit from tax advantaged status

Is using high dividend yield REIT as passive income sounds very good?

Do you hate borrowing, right issues or private placement?

If yes, then avoid REIT, it is not for you. Why?

REIT simply distributes all or almost all of its profits and gets to skip the taxation and seldom attempts to pay off its debts and depends on borrowing, refinancing and even raise funds to survive.

How does REIT survive in bad times?

It depends on its ability to refinance or raise fund from the capital market. Ability to raise fund that counts.

How does REIT grow?

Since REIT already pays out most of its earning as dividends; it is very hard to grow from retained earning or internal funding.

It has to borrow or raise funds from the capital market to grow.

Is Low Gearing REIT safer?

Not really sure leh?

Less borrowing or low gearing just means that the REIT has currently slowed down its growth potential and become more concerns over survival. It doesn't necessary means that it is safer than a higher gearing REIT.

It is the ability to refinance short-term maturing debts or raise funds from the capital market that determines its level of safety in the market.

Lower debts don't mean that creditors are not going after their blood if things get nasty.
When the REIT has less confidence in its ability to refinance short-term maturing debts or raise funds; it is more likely to reduce its gearing to increase its chance for survival.

All investments by nature are risky and just don't get too excited over its high dividend yield and become over-exposed to this sector.

1 comment:

  1. Hi CW,

    You are talking blogging about one of my favourite topics. So, my mouth also itchy. :)

    A REIT with lower gearing is definitely safer than a REIT with higher gearing, in good times and bad times.

    A lower gearing would allow a REIT to ride out recessions as property valuations would probably fall. Examples: First REIT and LMIR didn't have to issue rights or do a share placement during the recent crisis.

    A lower gearing in good times would give a REIT more leeway to take on more loans to make yield accretive purchases. Example: Hyflux Water Trust (which strictly speaking is a business trust but its principles are similar to REITs') had zero gearing and was able to take on 3 more plants from its parent, Hyflux, easily.

    A REIT is a dividend instrument and if anyone is after passive income in the stock market, having a blanket disregard for REITs just because they dislike borrowings, rights issues and share placements would be short sighted.

    Not all REITs are created equal and there will always be some better ones. Look for relatively low gearing, high yields and a significant discount to NAV and you would probably have a winner.


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