Investing in a REIT for a start?

A reader asked what's my view on vesting in a REIT for a start (of the investing journey)? This was posted on the article where I revealed that CapitaLand Mall Trust (CMT) was my first stock back when I began my investing journey.

I can't say "yes" or "no" to the question, but I can try to discuss some points about REIT.

REITS must distribute 90% of their distributable income
This is mandated by MAS. Distributable income is not the same as net profit. Distributable income is more like cash earnings (so a valuation loss will not affect it's distributable income of a REIT).

Most REITs distribute dividends quarterly, this somewhat gives investors a steady stream of dividends. 

Somewhat is key, because REITs are not fixed deposits/bonds. Dividends are not guaranteed.

You could lose your capital invested
As REITs are not fixed deposits, your capital is not protected. Instead, the share price of the REIT will fluctuate like your normal companies.

A recession could put your REIT in distress. A rise in interest rates could wipe out your value of the capital injected.

REITs are highly geared
So watch out for the gearing of REITs. Anything that's on the high side (>45%) should be deliberated carefully.

Any rise in interest rates could easily cause their finance cost to jump, thereby reducing your Distribution per Unit (DPU).

Look out for REITs with relatively lower gearing, evenly spread out debt maturity (CMT & PLife), low debt costs (Parkway Life is amazing with only 1.5% all in cost).

Not all REITs are equal
There're different industries that the REITs are in. Some hold industrial, commerical and hospitality properties (which tend to be cyclical), some hold retail buildings (I tend to view shopping malls as somewhat resilient), some are healthcare related (Parkway Lift & First REIT), some properties are in Singapore whilst others are out of Singapore.

You'll have to consider the following:

• Industry risk: Cyclical, resilient?
• Country: Any risk in foreign currency fluctuations, regulatory risks?
• Quality: Different REITs' buildings have different quality. Some are viewed to be of higher quality (therefore they tend to be traded at a premium above their peers).
• e.g: Plaza Singapura vs Wisma Atria vs Paragon
• Maturity profile of their tenants: Are they concentrated or well spread out?

Dividend Yield is important, but this criteria would only be considered after all other factors. After all, the we don't want to be caught in the yield trap.

Most people invest in REITs for income, not capital gains

So don't expect too much of a share price movement. This ain't your Jumbo share.

I won't say a straight out "Yes" or "No" to this question. But do consider the following, do your homework, and make the decision for yourself. Only you know yourself best, so let you make the best decision for yourself.

Consider if you're ready for rights issue

Sometimes, a REIT may require additional funding and they may issue rights to the private and/or public investors. Similar to what AK says, I've always preferred REITs that conducts rights issue for the public (this way, we won't have our holdings diluted).

Some may delude that rights issue is "getting back the dividends paid out previously to you". Well, it depends.

If a REIT issues rights for expansion plans, to acquire yield accretive projects, I'll be happy to take part in it. But do consider if you've the financial capability to take part in it.

If a REIT issues rights to "beef up their balance sheet", "pay down loans", and for "working capital purposes", then sorry, that's a huge red flag and I'll reconsider my decision to hold that REIT.

Hope this helps? :)