How to invest in REITs in Malaysia and why is it an alternative to property investment?

Real Estate Investment Trust (REIT) is an investment vehicle that provides an opportunity for small-time investors to buy into commercial, retail and luxury real estate such as hotels and malls at an affordable price.

For many people, investing in property is a pipe dream, especially with “affordable” homes costing as upwards of RM400,000 these days. Many Malaysians cannot afford to buy a house for their own stay, let alone for investment. Is there a viable alternative for the average person who does not have the cash to invest in properties? The answer is REITs!

Allow us to explain what is REITs is and how it works.

1. What is a Real Estate Investment Trust (REIT)?

In simple terms, REITs are shares of commercial properties listed on the Bursa Malaysia stock exchange that is owned and managed by professionals or property developers. Properties under a REIT are income-generating real estate such as shopping malls, hospitals, factories, warehouses, offices and farms. REIT pools monies from numerous investors, similar to unit trust, for investment in the aforementioned real estate ventures.

Hence, investors who buy shares in a REIT will enjoy dividend payments which are distributed either quarterly or semi-annually. The dividend payouts are essentially rental income gleaned from the real estate being managed by the REIT, property management charges and capital gains from business activities conducted at the real estate.

For example, Mid Valley was developed by IGB Corporation Berhad and comes under IGB REIT on Bursa Malaysia. This means investors can invest in Mid Valley and enjoy part of its rental and business income earnings without having to purchase the entire shopping mall.

Below is a list of all 18 REITs which are listed on Bursa Malaysia:

2. Are there Islamic REITs or Syariah-compliant REITs in Malaysia?

Yes, there are. As with other types of investment, there are REITs that conform to Syariah or Islamic principles in their business activities. According to Bursa Malaysia, out of 18 REITs in Malaysia, four are Islamic or Syariah-compliant REITs (i-REITs). They are:

1. Al-’Aqar Healthcare Reit (ALAQAR) – hospitals and hotels
2. Al-Salam REIT (ALSREIT) – offices and factories
3. AXIS REIT (AXREIT) – warehouses, offices and factories
4. KLCC Property Holding (KLCC) – offices and shops

The difference between i-REITs and conventional REITs is the source of income. i-REITs derive their income from business activities that are Syariah compliant – which excludes business activities deemed unethical, such as dealings with alcohol, tobacco, gambling and non-halal food products. As for i-REITs that do business in a mixture of Syariah-compliant and non-Syariah compliant activities, the returns from non-Syariah compliant activities must not exceed 20% of their overall incomes.

READ: Which REIT to invest in on Bursa Malaysia?

3. What are the advantages of investing in REITs?

i. You do not require a huge capital

REITs are perfect for beginner investors. With as little as RM100, anyone can give it a go. For example, let’s take a look at the Amanah Harta Tanah PNB (AHP) REIT, where the price for 1 unit listed on Bursa Malaysia is RM0.75. The minimum share purchase fixed by Bursa Malaysia is one lot, which is equal to 100 units.

Therefore:

RM0.75 x 100 = RM75.00 (the price of one lot of AHP share)

See? With such a small capital, you, too can start a property investment portfolio of your own.

However, it is best that you set aside a larger capital as there will be several payments before you can start investing. These include broker fees, clearing fees, Sales and Service Tax (SST) and stamp duty. To better understand this, let’s look at a sample cost calculation. Say you intend to buy one lot of AHP shares as mentioned above. The price is RM75. The following is the full capital requirement:

Broker payment:
Say your broker charges 0.08% or a minimum of RM8.
RM75 (capital needed to invest in AHP stock) x 0.08% = RM6 (not enough for minimum payment)
= RM8 being the minimum broker charge

SST:
RM8 (broker fee) x 6% = RM0.48

Clearance Fee:
Fixed by Bursa at 0.03% of the total share trade
RM75 (investment capital) x 0.03% = RM0.0225

Stamp Duty: 
Fixed by Bursa at RM1 for each transaction amounting to RM1,000.
Total stamp duty = RM1

Grand total:
RM75 + (RM8 + RM0.48 + RM0.0225 + RM1) = RM84.5025

ii. REIT investment is not as complicated as typical property investment

Unlike traditional real estate, REITs are traded on the stock exchange. Investors can get the diversification that real estate provides without being fastened down on a long-term basis; REIT shares are very liquid as they can be easily bought and sold. Also, the pooled capital enables for the purchase of real estate that investors normally could not afford – commercial, industrial and retail properties.

Compare this to a typical property investment, where the process of buying and selling takes anywhere between six months to two years. This is because there are many parties involved, such as the buyer, agent, property, lawyer, bank, the Inland Revenue Board and the land office.

MORE: How to invest in property in Malaysia? Here’s a complete guide.

iii. Easy conversion to cash

REITs are a wise investment choice as it is listed on Bursa Malaysia and has high liquidity. This means you do not have to endure many processes and a long wait to convert your assets to cash, unlike physical real estate such as houses. REIT shares can be converted to cash in less than a day. Just click ‘sell’ on an online trading platform, and the money will be credited into your account based on the number of REIT units sold.

iv. High dividend payouts of at least 90%

In order to qualify for tax relief, a REIT will distribute at least 90% of its earnings to unitholders. The dividends enjoyed by investors are between 5% to 7% with distribution every three months or twice a year, depending on the REIT fund manager. This rate of return is far higher than most rental properties, where the rental return is only between 3% to 5%.

The returns from REITs are also said to be less volatile compared to other markets. This is because REITs uses property rentals as their main source of dividend yields. As long as there are tenants, dividend rates will remain stable. For example, REITs were also affected by the 2008 economic crisis. The price of Axis REIT dropped from RM2 to RM1. However, Axis REIT continued to pay out dividend yields of around 15% to its unitholders.

v. REITs are managed by professionals

“But I don’t know much about shares,” you say. There is nothing to worry as your REIT investment will be fully managed by professionals, unlike investing in a physical property where you need to consider the type of property, home loan and Real Property Gain Tax (RPGT). And let’s not forget having to deal with difficult tenants.

vi. Tax advantage 

Malaysian REITs are exempted from tax on the purchase or moving of properties. A Malaysian REIT does not have to pay stamp duties when it acquires properties, and similarly when it disposes of an asset,  the REIT does not have to pay real properties gains tax (RPGT). These two tax advantages itself generate a significant amount of savings for a REITs fund, which benefits are enjoyed by its shareholders or investors too.

4. What are the disadvantages of investing in REITs?

i. You might have to pay withholding tax

Unlike our Singaporean neighbour, Malaysian REITs do not enjoy a zero withholding tax for individual unitholders. REIT investors can be Malaysians, foreigners, individuals, companies or collective investment vehicles; thus the REIT manager has to deduct withholding tax based on the profile of each investor upon declaring dividend distributions. Meanwhile, Singapore only levies a withholding tax of 10% on distributions to non-resident non-individuals

ii. No say over management aspects

Because the investment is fully managed by the REIT company, investors have no say and are not involved in any decision-making regarding the property in question. If IGB Corporation Berhad decides to sell Mid Valley for example, IGB REIT investors are powerless to stop the move. Nevertheless, the distribution of dividends proceeds as usual, no matter what decisions are made by the REIT company,

iii. No guarantee of returns

Even though investment in REITs promises a dividend that is consistent, the actual return received by the investor is dependent on the performance of the property market. For example, if Mid Valley performs poorly due to a decrease in shoppers’ traffic and tenancy, it would drive the IGBREIT unit price down.

Unlike conventional property investment, you can always sell your share if you sense that the price of a REIT share is going down. If the property that you bought produces a low capital gain or tenancy is difficult to secure as it is not located in a strategic area, you will have difficulty finding a buyer for the property.

5. How do I invest in REITs in Malaysia?

Investing in REITs is the same as investing in any share. Therefore, REIT is subject to the same trade, payment and settlement procedures. You still need to open a trading account and a Central Depository System (CDS) account that keeps track of buying and selling of shares before you can start investing.

In Malaysia, REITs are regulated by the Securities Commission (SC), which has issued “Guidelines on Real Estate Investment Trusts” pursuant to section 377 of the Capital Markets and Services Act 2007 (CSMA).

Follow these basic steps to begin investing.

Step 1: Pick a brokerage firm

Browse the Bursa Malaysia website and pick a suitable brokerage firm. Take note of the broker’s commission fees, ease of transaction, whether it is Syariah compliant and how user-friendly is the preferred online trading platform.

Step 2: Open a trading account and a CDS account

After selecting a broker, set an appointment with the broker to open these accounts. Typically, you will be asked to provide documents such as copies of your identification and bank account statement. Your broker will also give you a tutorial on how to use the online trading platform.

Step 3: Put funds into your trading account

Opening an account takes a few days. Once your account is activated, you can proceed to put funds into the online trading platform. Add funds based on your financial ability.

Step 4: Start investing!

With sufficient funds in your trading account, you may now start buying and selling shares on Bursa Malaysia using the online trading platform.

All the best in your REIT endeavour!

*This article has been repurposed from “REIT: Pelaburan Hartanah Dengan Modal Serendah RM100”, first published on Loanstreet.com.my. Edited by Reena Kaur Bhatt