What investors need to know about REITs and recurring income streams

Investors seeking a steady income stream often encounter REITs appearing in the Thai stock market since 2018. This financial instrument has transformed the way access to real estate is achieved, making it easier for those without sufficient capital to purchase properties directly. However, before deciding to invest, it is important to understand the characteristics of each type, as not all will provide the same returns.

What kind of real estate management do REITs involve?

Real Estate Investment Trusts (REITs) differ from Property Funds in that they are more strictly regulated. Fund managers raise capital by selling units and then purchase income-generating assets such as condos, warehouses, shopping malls, or even foreign real estate. They generate income from rent or other benefits and distribute profits to unit holders regularly each year.

Why are REITs suitable for those seeking regular income?

The advantages of investing in REITs include several points. First, high liquidity, as they can be bought and sold on the Thai stock exchange (SET) like regular stocks, so there is no need to wait until the end of a contract to withdraw funds. Second, the cash flow generated from property management is consistent and clearly exceeds typical fixed interest rates. Third, REITs are overseen by various regulatory agencies, ensuring transparency and making them a good option for diversification of an investment portfolio.

However, a downside is that dividends are subject to a 10% withholding tax or included in annual income tax deductions. Additionally, REITs are sensitive to changes in interest rates; during periods of high interest rates, the value of REITs may decline.

How many types of REITs are there?

Real estate investment trusts can be classified in several ways. Based on ownership rights, REITs with (Freehold) rights allow investors to own the property and have rights to income indefinitely. The unit value of this type can increase with property development. Conversely, REITs with (Leasehold) rights do not involve full ownership but only leasing rights. When the lease expires, the unit value will decrease significantly.

From a business type perspective, real estate can be categorized into Retail REITs for shopping malls and retail spaces, Residential REITs for hotels and dormitories, Office REITs for office buildings, Healthcare REITs for hospitals, and Infrastructure REITs for telecommunications networks and essential infrastructure. Each type has factors affecting dividend payments differently.

What causes REIT values to increase or decrease?

The value of a REIT depends mainly on two components: the value of the real estate assets it holds and the expected income from managing those assets. The property value fluctuates with economic conditions, area development, and supply-demand dynamics. For example, if an area sees increased construction investment, property appraisals will rise, leading to an increase in REIT value.

The income stream relates to the number of tenants, turnover rates, and the stability of the supporting business sectors. For instance, Retail REITs are affected by consumer purchasing behavior, while Office REITs depend on demand for office space. If the business sector expands, tenants’ income increases, enabling higher rent payments.

Examples of Thai REITs and their dividends

Currently, the Thai stock market features various REITs, such as CPNREIT, a Leasehold REIT managing assets from several Central projects and office buildings, including the Hilton Pattaya hotel, with an annual dividend yield of 8.35% from a price of 9.85 THB.

IMPACT is a Freehold REIT holding ownership of office buildings and IMPACT convention centers, with a dividend yield of 4.69% from a price of 12.80 THB.

WHART is a hybrid of Freehold and Leasehold REITs managing warehouses, with a dividend yield of 7.63% from a price of 9.50 THB.

JASIF is an Infrastructure Fund of the Freehold type, owning fiber optic cables and earning rental income from telecommunications companies, with a high dividend yield of 13.73% from a price of 6.70 THB.

Considerations before investing

Before investing in REITs, it is important to consider whether the rights are Freehold or Leasehold, as this affects the sustainability of dividends. For Leasehold REITs, check how many years remain on the lease to assess the investment horizon. Additionally, review which type of real estate each REIT invests in, as different sectors are sensitive to economic factors differently.

Real estate investment trusts (REIT) are a balanced option for investors seeking diversification, steady income, and liquidity for sale. The key is to select a REIT that aligns with your investment goals and risk tolerance.