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Real estate investment trusts (REITs) are a unique form of investment, designed to make money for you through the property industry.
A REIT in Malaysia operates by pooling the capital of numerous investors, creating a single investment fund. It then goes on to own, sell, or operate some form of income generation in the real estate market.
To put it simply, it's essentially a collective investment vehicle to gather funds and access better investment opportunities, but specifically for properties.
This type of investment is listed on Bursa Malaysia, making them an accessible (and more secure) option for many Malaysian investors.
REITs in Malaysia enable individuals and organisations to invest in the lucrative real estate market, without the need to directly and individually purchase, own, or manage property themselves.
The chances are, you’ve been inside a REIT property without even knowing it! Numerous malls throughout Malaysia are owned by real estate investment trusts, for example.
Ready to get to grips with REIT investment in Malaysia, and whether you should give it a try? Here’s everything you need to know.
History And Benefits Of REITs In Malaysia
Since REITs are investment funds, you’ll be delighted to know they’re governed by strict legal and financial criteria.
That means they must comply with the Guidelines on Listed Real Estate Investment Trusts, as defined by the Capital Markets and Services Act 2007, in order to be listed on Bursa Malaysia.
Any REIT that's about to be listed on Bursa Malaysia also requires approval from the Securities Commission.
The first REIT was actually founded in the US, way back in 1960. They didn’t make their way to our shores until 2004, when AXIS REIT became the first such fund in Malaysia.
Malaysia REITs allow investors to enjoy the benefits of a lucrative asset class such as real estate, without the full financial exposure of a wholly-owned property.
REITs offer an affordable avenue to property ownership, as they cost just a fraction of the price of a direct real estate investment (read: buying the entire unit).
Since they’re investment fund objects, they’re also traded far more easily than a property. There’s no viewing/offering/selling involved, it’s just the case of a simple market transaction.
Unlike a single property, these kinds of trusts also offer the benefit of a diversified portfolio. You’re not tied up in one property, but instead have your investment distributed across a number of different properties.
Supporters argue that this kind of diversified portfolio is likely to mean less risk as compared to a single investment type.
Champions of REIT investment in Malaysia also favour the reliable income stream they tend to give, with the steady money inflow often provided by tenants.
While REITs do earn cash from buying and selling of property, rent is generally the primary source of profit for these funds.
All this comes with the benefit of a professional property manager who deals with the day-to-day management while hopefully steering the property to a sustainable return.
Of course, there are no guarantees in the world of investment, but REITs are largely seen as a favourable, secure, and valuable investment by many.
Talking Tax With REITs
One element of the REIT investment profile that’s particularly attractive is the special tax status these investments tend to enjoy.
Assuming all the right criteria are met, the majority of investment income from REITs is exempt from income tax.
If 90% or more of its total income is distributed to unit holders, a real estate investment trust in Malaysia will be exempt from income tax. Otherwise, the total income of the REITs will be taxed at the relevant rate of income. This exemption only applies to those listed on Bursa Malaysia
Due to the complex ownership of REITs, with everyone from individual investors to business ownership, the Malaysian tax authorities impose what's known as a 'Withholding Tax'.
This is a tax charged on the payer of an income, rather than the recipient. For REIT in Malaysia, this is charged at 10% for individuals.
One more big plus for REITs is that they are exempt from the tax on transfer of immovable property, unlike individually-owned physical property assets.
These investment funds do not have to pay 3% stamp duty on the purchase price. They also don’t have to pay out Real Property Gains Tax (RPGT), which can run as high as 30% for some groups in certain circumstances.
Risks Involved With REITs
There are no guarantees in the world of investing. As we have noted, REITs are heavily based on property rental income.
If large companies are struggling to pay rent, that may impact the returns on some REITs. There’s no certainty either way, but you need to understand the risks before jumping in headfirst.
If the particular fund you're in does not generate enough income, then you will not enjoy those healthy returns that supporters promote.
It’s also worth noting that, unlike direct property purchase, you have no control over the sale/purchase/rental decisions of a REITs fund.
You’re merely an investor along for the ride, who is trusting the fund manager(s) with your money to make the "right" decisions on the entire fund's behalf.
However, the fact that you can track performance is a good way to understand how well (or badly) some REITs might be doing, hence the listing on Bursa Malaysia.
How To Get Into REITs
You don’t have to be part of some secret investment club to invest in REITs! There are currently 18 real estate investment trusts listed on the Bursa Malaysia stock market.
These listed REITs can be bought and sold just like stocks, with clear reporting and tracked performance to assess. You just need to engage a stockbroker to purchase these investment funds.
Malaysia also boasts a number of unlisted REITs though, which are somewhat more complicated for the average Malaysian to become involved in.
These are classified as unit trusts, and can be bought or sold through authorised agents or a registered management company.
Available REITs In Malaysia
All REITs relate to property, but they don’t all cover the same property type and structure. These generally operate in some core categories of real estate, so we’ve put together a quick summary below.
Remember that these investment vehicles can earn profits through buying and selling property, but primarily generate funds through rental.
REITs Primary Areas of Operation
Shops, malls, commercial retail premises
Industrial land and buildings, factories, etc
Office buildings, office space
Hospitals, clinics, healthcare facilities
Warehouse facilities, storage and logistics
Parking infrastructure, car parks
Residential property, rental properties, primarily large multi-unit properties
The REITs funds listed in Malaysia today are not exclusive to one sector. Some do operate in multiple sectors. However, most tend to concentrate their funds on just one or two focus areas for investment.
1) Do I get to control what the fund is used for?
No, you are investing the money and trusting others to create a winning investment portfolio. You can’t pop round and suggest they redecorate an entire mall to improve the rental return.
2) Are REITs tax free?
No. If 90% or more of its total income is distributed to unit holders, a real estate investment trust in Malaysia is exempt from income tax. However, the fund will still be taxed a Withholding Tax at 10%.
3) Do I have to pay RPGT on REITs?
No. Real property gains tax is not applied to REITs property transactions.
4) Are there any other ‘hidden’ costs?
Not so much hidden, but you should be aware that you will need to pay brokerage fees to a stockbroker to undertake your transaction. That’s basically a service fee for the stockbroker undertaking the transaction on your behalf.
5) How do REITS compare to shares?
If you’ve got a solid and stable share, chances are you can enjoy low but steady growth. If you’ve got some volatile but high-potential share, you trade off greater risk for greater potential reward. REITs may be traded on the market like shares, but there’s no clear ‘better’ option.
6) How do REITs compare to rental investment?
If you’ve got the money to purchase a property, would you think about purchasing your own property investment for buy-to-let purposes?
Well, an average return in Malaysia is about 4% for rental. It’s not unheard of to see yields of 6%-7% with REITs, but it depends on performance, and this is not guaranteed.
One final warning! There are no certainties with these investments. If you’re unsure whether it’s the right choice, you should always speak to a financial professional first.
Want to dive deeper into the world of property investment? Here’s The 10 Steps To Growing Your Wealth Through Property Investment to help you get started!