A Simple Introduction to Real Estate Investment Trusts (REITs)

What are REITs?

REITs work similarly to other trust funds in connecting all stakeholders, including the management company, trustee, and unitholders. A real estate investment trust (REIT) is an investment instrument that aims to invest at least half of its total assets in real estate, either directly or through a single-purpose corporation whose primary assets are real assets. It invests in properties that generate income, such as residential, commercial, and retail buildings, plantation land, storage facilities, warehouses, car parks, and many more.

How Do REITs Make Money?

Most of them follow a simple and easy-to-understand business model. The firm makes income by leasing space and collecting rent on its real estate. The shareholders subsequently distribute the income in the form of dividends. REITs company must payout at least 90% of their taxable income to shareholders, with the majority paying out 100%. Dividends are paid to shareholders, who then pay income taxes on them.

Some Statistics on REITs

In most Asian countries, rapid urbanization and large population growth require the creation of residential areas and units. For example, in Malaysia, 72%of the population lives in urban areas, and the annual pace of urbanization is 2.4%. Another example is China. The annual rate of urbanization in China is 2.3%, and 47% of the population lives in urban regions. This has prompted real estate investors to put their money into creating homes for people. Moreover, economic growth and increases in the number of tourists, hotels, and other things all influence the need for real estate development.

Asian REITs account for 10.6% of all worldwide REITs, with Japan and Singapore having the greatest market capitalizations of 6.66% and 2.26%, respectively. In addition, approximately 145 million Americans live in households invested in REITs through their 401(k), IRAs, pension plans, and other investment funds.

In the case of Malaysia, the total amount of transactions involving real estate investment trusts (REITs) was around RM2 billion in 2020. Office properties followed by industrial assets dominated the real estate. In 2019, however, the entire value was slightly below RM300 million. The number shows that, even though the REITs market slowed down during the pandemic that emerged in 2019, the industry has now started to show good growth potential.

Investing in REIT is a good strategy to diversify your portfolio. However, you must study the market before making an investment decision. All kinds of investments will require proper risk calculations to avoid losses.

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