Posted on December 30, 2009 - by Market Uncle

Investing in REITs – Really for the yield?

Photo by Lachlan Hardy

Business model of typical REIT

People invest in Real Estate Investment Trust (REIT) primarily for the stable dividend yield. REITs are supposed to provide good source of passive income for those with neither the cash nor the leverage capacity to invest in typical properties for passive rental income. Is this really so?

Before answering that question, let’s look at the business model of a typical REIT. In layman terms, REIT acquire properties and lease them out for rental income. The funds for acquisition comes either from shareholders (share issue), banks (loans) or both. REIT is supposed to pay out ALL profit from rental income less all other business expenses (including bank loan interest) required to keep the REIT alive.

During Good Times

When the economy is booming, demand for factory, office and retail space pushed up rents and hence the record rental income for REITs, pushing up the dividend per unit (DPU) of these REITs. However, the prices of these REIT surge even higher, and hence the yield is actually very low. For blue chip REIT like the Capitalmall Trust, yield got as low as mere 3 to 4% in 2007. At such yield, I am quite puzzled whether the investor are indeed after the dividend yield. Read more…

Related posts:

1. Yield Investing versus traditional Value Investing
2. Current outlook of S-REITs
3. What is the yield on housing investment?