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REIT (real estate investment trust) is a collective investment vehicle, which pools funds from investors to invest primarily in a portfolio of income generating real estate and real estate related-assets. A REIT is a structure in the form of a unit trust, with an independent trustee and a management company. It is constituted by a deed entered into between the trustee and the manager of the REIT. The deed, which must be registered with the Securities Commission (SC), set out: The rights, duties and obligations of the management company, trustee and unitholders; and The terms and conditions for the management and administration of the REIT

Who should invest in REITs? REITS are promoted as a long-term investment instrument. It also represents an indirect mechanism for participating in large-scale yield accretive properties. Investments in REITs carry a relatively low risk-return prole as compared to investments in equities or shares and direct investments in property. Therefore, REIT is best suited to an investor who: Has long-term investment objectives and moderate risk appetites Seek regular distribution of income and long-term capital appreciation Understand the risk related to the real estate industry and REITs.

REITs aim to provide investors or unitholders with regular returns derived from the property income and any capital appreciation from its real estate, real estate-related investments and other authorised investments. The basic structure of a REIT is illustrated below:
Unit holder Invest in units

What are the advantages of REITs as compared to other types of investments? Investments in different asset classes are subject to different risks and returns. The general risk-return prole for each asset class is illustrated below:
Highest Risk/Highest Returns Equities

REIT management Manages REIT

REIT Constituted by deed

Trustee Safeguard interests of unitholders

Properties REITs Fixed income securities Cash & bank deposits

Authorised investment Invest in real estate, real-estate related assets and other authorised investments

Lowest Risk/Lowest Returns

Investment in cash and bank deposits Investments in cash and bank deposits with licensed institutions are considered to be relatively risk free, while the underlying risk of investing in REITs is generally higher in comparison. However, investments in REITs could potentially benet from a moderately higher rate of return as compared to investments in bank deposits, especially in a low interest rate environment. In addition, investments in bank deposits will not yield capital gains. As such, at times of high ination, it is more worthwhile to invest in REITs. 1

Income and capital gain distributions

REITS are promoted as a longterm investment instrument ... Investments in REITs carry a relatively low risk-return prole as compared to investments in equities or shares and direct investments in property.

Investments in units of listed REIT are highly liquid and can be easily be bought or sold through the stock exchange like shares of other public listed companies. Accordingly, investments in REITs, especially listed REITS, are more liquid than investments in physical properties.
Investment in xed income securities

regular distributions as compared to investments in REITs. How to use REITs to achieve investors aims? The following are some of the objectives of investing in REITs: Stable and predictable income REITs generally provide investors with a stable and predictable income stream because REITs income is derived from investment grade real estate assets, which generate recurring cash ow through tenancies and leases for specic duration, which usually range from 1 to 5 years. Potential for capital appreciation Investments in REITs also offer investors the potential for moderate to long-term capital appreciation in the unit price of the REIT. This is because increase in the asset value and anticipated income growth of the assets of the REIT are generally reected in the price of the units in a REIT. Diversication REITs enable investors to diversify their investments by providing them the opportunity to pool their resources for the purchase of a diversied portfolio of real estate and real estate related assets. Further, investors in a REIT can usually access a broader range of real estate if they were to invest on their own. Professional fund and asset management REITs provide investors the opportunity to invest in a portfolio of real estate managed by an experienced and professional management company. The management company should help to create future capital growth through active property and portfolio management. Affordability and ability to participate in properties of signicant values REITs represent an indirect form of ownership in real property. It is more exible and less capital intensive compared to direct investment in real property. As such, it allows retail investors to participate in returns from properties of signicant values with only a small investment outlay by investing in the REITs. Liquidity Investments in units of listed REIT are highly liquid and can be easily be bought or sold through the stock exchange like shares of other public listed companies. Accordingly, investments in REITs, especially listed REITS, are more liquid than investments in physical properties.

Fixed income securities include bonds, loan stocks, commercial papers, medium term notes and other debt securities. Fixed income securities can provide stable interest income and are generally less risky than investment in equities or shares but are riskier than cash and bank deposits. Changes in interest rates will cause the capital value of xed income securities to uctuate thereby giving rise to capital gains and losses. Fixed income securities are also subject to the credit risk of the issuer. Investment in properties Although the risks of direct investment in property are generally lower than for equities or shares, there are still risks involved. These include the cyclical movement of property prices, changes in interest rates and weakness in demand for particular properties, uctuation in the overall property market and the economy and site-specic factors, which may affect the demand for properties within the vicinity. Compared to an investment in REITs, a direct investment in properties requires a large capital outlay and therefore the ability to diversify investments is more limited. A direct investment in property is also less liquid and thus more difcult to dispose compared to investments in marketable shares, bonds and listed REITs. Investment in equities Investments in equities or shares can deliver higher returns than most other asset classes over the longterm. However, the share prices are generally more volatile than other asset classes. The share price may fall for many reasons such as general market and economic conditions, risk associated with specic business or company specific risks. Company specic risks are inherent in a particular companys performance due to factors that are related to the company. Hence, a companys returns may differ from that of the market. In addition, investments in shares may not provide 2

Table 1
Tax treatment Residents Non-residents Malaysia Taxed at unit-holders tax bracket Withholding tax at 28% Singapore Total tax exemption Withholding tax reduced to 10%

(2) value accretive strategies adopted by savvy managers to deliver targets. Hong Kong REITS started in 2004, while the success is not as evident as those in Singapore, probably due to timing issues; the Hong Kong REITS is looking up due to its high returns and exposure to the Chinese market. Are there any tax advantages of investing in REITs? The tax benets are the key reason driving the success of REITs in Singapore. However, the status of tax transparency in Malaysia is not as attractive when compared to Singapore, where there is total tax exemption for distributions by REIT. Please refer to Table 1 for comparison. Have the few REITs listed in Bursa Malaysia met investors expectations or is it too early to tell? What needs to be done?

Details on Taxes for Malaysian REITs

Tax transparency RPGT exemption Stamp duty exemption - Income distributed is exempted from - income tax - Undistributed income is taxed at 28% Income, tax and subsequently distributed is eligible for tax credit: - Resident unit-holders are taxed at respective tax rates - non-resident unit-holders are taxed at 28%, and tax is withheld by REIT. For one-time transfer of properties to REITs For one-time acquisition of properties by REIT.

Protection from ination The values of real estate and rental rates are generally expected to increase during periods of ination. Therefore, investments in REITs are, to an extent, safeguarded against the long-term effects of ination.

Transparent operating and management policies The management company is required to adhere to the investing objectives and strategies prescribed in the deed. Most REITs operate along a straightforward and easily understandable business models. By increasing rents or occupancy rates, higher level of income may be generated. In addition, an independent trustee will safeguard the interests of the unit holders by monitoring and supervising the management company in the management and administration of the REIT. Therefore, investments in REITs generally offer greater earnings transparency and better corporate governance as compared to investments in equities.

The unexciting share price performance of REITs over the last three months seems to have indicated declining investors interest in Malaysian REITs. Apart from the fear of rising interest rates, some complaining that there is no signicant effort by most trust managers to enhance yields by refurbishing to increase rentals or by acquisitions, while others are wary of the related party transactions where the building are rented to parties related companies, which may offer little upside in rental yield over the longer term. In addition to the reasons stated above, we believe that another reason for the less aggressive strategies of property manager is that their leverage capacity is capped at gearing level of not more than 35 percent.

Country

Gearing

The overseas experience of REITs REITs rst started in the U.S. 40 years ago. The U.S. is the most developed REIT market with around 180 publicly traded REITs. In Asia, Australian REIT market is the most established with around 40 traded REITs. Singapore REITs took off in 2002 and has achieved maturity in a short span of time, thanks to (1) good transparency, and

We believe that the government should look into a slight relaxation of this rule, in order to encourage more M&A (mergers and acquisitions) activities in Malaysian REITs. The other measures such as inter-related company transactions should also be addressed. Malaysian authorities should also seriously consider the issue of tax exemption for unit holders. UT Article contributed by Avenue Group. 3