Real Estate Investment Trust (REIT) is simply a trust company who uses the pool of funds from investors to acquire properties which they will manage, develop and possibly sell. Once the REIT acquired the properties, they will be these properties’ owner and managers will be entrusted to manage these properties. The task of these managers will be to lease out the properties for rental income which will be distributed to the investors. The managers will occasionally renovate the properties, upgrade, tear down and rebuild or sell the properties to increase the income.
Singapore REITs are regulated by various regulations like the Code on Collective Investment Scheme (CIS), Property Fund Guidelines (PFG) and the Singapore Code on Takeovers and Mergers. Though the guidelines for REITs were first introduced in 1999, Singapore’s first REIT, CapitaMall Trust, was only successfully listed on Singapore Exchange (SGX) only in 2002. Singapore REIT is currently the largest REIT market in Asia, outside Japan.
The success of the REIT is usually determined by a government’s pro-active stance in providing favorable tax treatments for REITs. The Singapore’s government promoted REITs for several reasons: The introduction of REITs created professional managers to manage the properties efficiently and in a cost-effective manner, often undertaking refurbishment and renovations to enhance the appeal or efficiency of the buildings. This allow rejuvenation of properties in Singapore, maximizing the property’s potential in a land scarce Singapore.
Although upgrading works will still be carried out without REITs, REIT managers will however intensify these upgrading efforts as their sole focus is to maximize yield for their unit holders. Also, by allowing property developers, banks or insurance companies to sell their properties into a REIT, it allows these property owners to liquidate their property position and generate cash for use in their core businesses. From investor’s point of view, REITs provide them with an avenue for investment, straddling halfway between a bond and a stock, also allowing them to enjoy the economies of scale and cost effectiveness from managing a portfolio of properties.
REIT investment is just like owning a pool of properties and hiring a professional manager to look after these properties for you, collecting rentals in terms of distributions. However, the main difference between investing in REIT and owning property to rent is there is no need for you to pay for stamp duty (typically 3% of the property price) when acquiring property.