To The Moon

A real estate investment trust (“REIT”) is a popular asset class among income seeking investors due to its regular dividend payouts. However, there are pains unknown to most investors that are seldom shared by speakers in public seminars.

Singapore's Garden By the Bay

The following 4 pains are the common issues constantly faced by REITs investors throughout their whole REIT investing journey.

Pain #1: Dealing with Rights Issues

REITs in Singapore have to distribute a minimum of 90% of the net income to enjoy the tax concession. As such, it is very common for a REIT to raise funds to acquire more properties or refinance the debt due to the limited cash on hand. When a REIT offers rights to existing unitholders, most of the time, the rights will be offered at a discount from the prevailing market price. The share price will most likely be adjusted downwards immediately after the announcement. There is no way retail investors could sell their current holdings immediately after the announcement is made. The investors are then left with no choice but to subscribe to the rights by injecting more cash or be forced to sell the rights at unfavourable prices. If the investors do not have enough ready cash or forget to subscribe to the rights for any reason, they will suffer losses from their invested capital.

Pain #2: Unable to Participate in Private Placement

A private placement is a capital-raising event that involves the sale of securities to a relatively small number of select investors. Usually, there is a discounted price offered to private investors during the private placement exercise. With the injection of the additional shares into the stock market, there may be a dilution effect on the distribution yield. Retail investors may be worse off as their current holdings are diluted without a chance to acquire additional shares at a discount. Similar to the rights issue, the share price will normally trade downwards after such an announcement is made, and investors may suffer capital losses on paper.

Pain #3: Getting Odd lot when do Dividend Reinvestment Plan (DRP)

Usually REITs pay dividend in cash every quarter or semi-annually. However, some REITs offer a Dividend Reinvestment Plan (“DRP”) to investors as an option to reinvest the dividend in discounted shares instead of receiving it in cash. It sounds good at the first look, but most of the retail investors will end up with odd lots as the investment holdings are normally small. Odd lots are considered to be anything less than the standard 100 shares. Odd lots are usually difficult to sell at a good price due to illiquidity and the wide bid-ask spread. Trading commissions for odd lots are generally higher on a percentage basis than those for standard lots, since most brokerage firms have a fixed minimum commission level for undertaking such transactions.

Pain #4: Unable to do Regular Saving Plan (RSP) with small amount

Dollar Cost Averaging strategy is an excellent way to accumulate REITs over the long term without resorting to timing the stock market. However, there are two major limitations for investors who contribute a fixed amount of salary to build the REIT portfolio every month. First, the investor who contributes $1,000 per month is unlikely to allocate into different REITs for diversification purposes – and most probably end up with odd lots per REIT. In addition, the transaction cost per order is high – this will erode the returns of the portfolio. These limitations make monthly RSP investing for REITs not a very viable solution financially and operationally.

The only way to overcome the above four pains is to pool the monies together to do bulk purchases by leveraging on the lower commission structure of a brokerage firm who can buy and sell in bulk. A discretionary REIT Managed Account is set up to address the above pains investors face. This Managed Account has an investment mandate to invest in global REITs for diversification purposes. Investors who wish to find out more about this REIT Managed Account may write tokennyloh@fapl.sg).

Kenny Loh is a Senior Consultant and REITs Specialist of Singapore’s top Independent Financial Advisor, Financial Alliance. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER. He has won multiple awards in financial planning and investment planning.