Monday, January 24, 2011

How about real estate investment trusts?

Real estate investment trusts (Reits) - which invest in a portfolio of properties and get income from rents - also offer investors access to the industrial and commercial market without buying bricks and mortar.

Reits may have a portfolio of offices or malls, such as CapitaCommercial Trust, K-Reit Asia, CapitaMall Trust and Suntec Reit. They are listed on the Singapore Exchange.

Experts said, however, there are significant differences between investing in a listed industrial or commercial Reit and a physical property of that type.

Colliers International director of research and advisory Tay Huey Ying said that the advantages of investing in a physical property include property rights ownership and pride of ownership.

A physical property is a visible asset and would give the investor a better sense of stability and security. It is also the preferred form of bequeathing wealth to the next generation in traditional families, she added.

'By owning the property, the investor is given the exclusive right to use the property while Reit investors hold only a share of the portfolio of properties and do not have exclusive rights to it.'

There is, however, a downside to the investment involving the larger capital needed to be stumped up and the more active role needed in the property's management and repair, said Mr Ong Kah Seng, Cushman & Wakefield's senior manager for Asia-Pacific research.

Direct property investment usually requires a higher investment sum owing to the indivisibility of properties, unlike Reits, and higher transactional costs such as legal and agency fees, experts added.

There is also less potential for diversification. The high investment outlay and location-specific characteristics mean that retail investors can afford to purchase only a limited number of properties, Colliers' Ms Tay said.

She added that Reits, however, allow the manager to acquire a variety of properties in different locations - including cross-border locations - allowing it to diversify the Reit's risks more effectively.

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