REITs give Filipino investors and other PSE participants a chance to invest the country’s real estate market. In this article, we will talk about what REITs are and why you should consider them when diversifying your portfolio.
What are REITs?
A REIT (Real Estate Investment Trust) is a type of investment company that owns and operates income-generating real estate properties such as apartments, shopping centers, office buildings, hotels, warehouses, and other types of real estate assets. REITs in the Philippines are designed to provide investors with a way to invest in real estate without having to buy, manage, or finance (loan for) properties themselves. In return, listing REITs allow real estate development companies to raise funds for future projects.
REITs in the Philippines
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Reasons to Invest in Philippine REITs
- Dividends for Income Generating Properties
In the Philippines, REITs are required by law to give out 90% of their distributable income as dividends. All REITs listed above have posted quarterly dividends since inception as of the writing of this article.
- Liquidity
REITs can be bought and sold on the Philippine Stock Exchange. This makes it easy for investors to liquidate their REIT assets when the need arises. In contrast, general real estate investing is considered a less liquid form of asset.
- Access to Real Estate Investing with Low Capital
REITs allow investors to access the real estate market without having to purchase, manage or finance real estate themselves. This can be particularly beneficial for those who don’t have the necessary capital or expertise to invest directly in real estate.
- Diversification of Assets
If you are already invested in the stock market, REITs give you an opportunity to spread your capital to a more diversified group of assets. This can help to reduce risk and volatility in a portfolio.
- Opportunity for Capital Appreciation
The value of REITs, when bought at the right price, can go up when the business of its underlying assets is doing well. Because its shares are bought and sold every day in the PSE, investors get a real-time assessment of the value of their investment. In practice, the share price of REITs tends to go up when investors think that its future dividends will go up.
- Professional Property Management
In the past, the only way for Filipino investors to get into real estate is to buy real properties or stocks of development companies. In the Philippines, REITs are more closely regulated than your regular company stocks. The PSE requires REITs to have independent fund and property managers. The pay for property and fund managers are limited to a maximum of 1% of the net asset value of assets under management.
Risks Associated with REIT Investment
- Real Estate Market Risk: REITs are sensitive to changes in market conditions in the Philippines real estate market, including economic conditions, interest rates, and market trends. A downturn in the PH real estate market or a rise in interest rates can negatively impact the performance of REITs.
- Property-Specific Risk: The performance of a REIT is heavily dependent on the performance of the properties it owns. Any issues with the properties, such as vacancies or declining rental rates, can negatively impact the REIT’s earnings.
- Credit Risk: REITs may take on debt to finance property acquisitions or expansions. The portion of the revenue used for debt payments may negatively impact the REIT’s dividend yield. If the REIT is unable to service its debt obligations or refinance its debt at favorable rates, it could face financial difficulties.
- Management Risk: The performance of a REIT is heavily dependent on the quality of its management team. Poor management decisions or ineffective management practices can negatively impact the REIT’s earnings and long-term performance.
- Liquidity Risk: REITs are traded on the PSE, but they may not be as liquid as other stocks. This means that it may be difficult to buy or sell REIT shares quickly, which can be a concern for investors who need to access their funds quickly. If liquidity is an important factor in your portfolio, you should look into Index Investing.