An effortless way to get rental yield

Firstly, let’s define “effortless” in the context of rental yield.

Effortless means, without the huge initial capital, the hassle of securing tenants or the renovation costs involved to make a property “tenantable”.

Deep down, which property investor really enjoys managing tenants or is fond of the costs associated with it, such as renovation costs, repairs, etc?

Yet, this is a small inconvenience compared to the potential capital gain an investor can reap in a relatively short time, using the power of leverage.

For more sophisticated investors, they would gravitate towards the passive nature of rental income. Not as thrilling as capital gain, but this still outweighs the pain that comes with tenant management.

If any property investor were to have a magic wand to redefine the ideal property investment, I reckon it would be close to what is written below.

“Perpetual inflation-adjusted rental income and doubling of property value every (insert your desired number) years, with a competent manager to manage all tenancy related matters besides not being entry-cost prohibitive.”

That something “close”  lies in Real Estate Investment Trust (REIT) counters has dropped so much for the past month or so. Seriously.

Here’s a review of what kind of yield you’ll be getting with reference to closing prices on Dec 31, 2013. The actual Distribution per Unit (DPU) or final dividend for most REITs in the financial year 2013 will be published in each respective REIT annual report in two to three months’ time.

Note: Bear in mind – these are gross yields. The net yield is 90% of the gross yield which is the amount which goes into your pocket. The 10% gets deducted at the REIT level as withholding tax.

Retail REITs

Retails REITs are one of the most “defensive” but their profit margin is going to be impacted the most by the hike in electricity tariffs taking effect this year. It is interesting to see how retail REIT managers are managing this by passing on the costs to tenants so that their shareholders still get decent distributions.

Sunway REIT closed at RM1.24 for the year 2013. If its DPU is not less than 8.3 sen in future, the yield is at a minimum of 6.7%.

In relation to Pavilion REIT at a closing price of RM 1.28, its DPU of 6.8 sen will give you 5.3%.

Capita Malls Malaysia Trust will give you a 6.0% yield with DPU of not less than 8.44 sen with reference to a closing price of RM1.40.

If Hektar REIT can maintain its DPU at 10.5 sen, then you as the prudent investor, will get 7% easily at an acquisition cost of RM 1.50 per share.

Office REITs

Let’s look at offices, which are generally less defensive due to oversupply. However, bear in mind that it is mostly the new office buildings that are having difficulty in renting out their units due to this situation. So, I think it is fair that we apply a small “discount” to its last DPU in 2012 due to the overall market performance.

Let’s just assume UOA REIT is able to distribute not less than 10.2 sen per unit going forward, so you would have essentially locked your yield at 7.0% with a cost of RM1.45 per share.

How about Tower REIT? If it is able to declare at least a DPU of 11.2 sen (Its 2012 DPU was at 11.52 sen), then the investor is getting 7.47% return at an entry price of RM 1.50, doing nothing.

If AmFirst REIT is able to declare 6.7 sen DPU going forward, thena  6.7% yield is certain, if your cost of acquisition was at RM1 per share.

Similarly, Quill Capita Trust’s estimated DPU of 8.3 sen (or more going forward) will bring a 7.0% return with an entry price of RM1.18.

Industrial REITs

Axis REIT has dropped tremendously from its previous high to RM2.93 per share. It has enjoyed the reputation of increasing its DPU year after year even during times of economic recession. Therefore, it should be able to declare even a slightly higher DPU than last year’s 18.5 sen – say, 18.8 sen. Therefore, you will be effortlessly getting a yield of 6.41%.

Should the underdog in industrial REITs, Atrium, be able to distribute at least 8.80 sen per unit moving forward, a DPU of 6.77% is certain for cost per share at RM1.30.

The reader needs to understand that the DPU is correlated with rental income, which should increase over time, regardless of a bull or bear cycle. This is absolutely true for REITs with a long proven track record like Axis REIT. Also, there is no reason why quality assets acquired by REIT should outpace inflation in terms of rental income return.

It is true that property investments have made many millionaires in a relatively short time. However, I think it is also true that unsuccessful stories are seldom told, as evident in this article - Completed but empty: Will Budget 2014 help fill up vacant properties? You don’t want to be the proud owner of a luxury condo unit and yet be “bleeding money” internally – hanging on your property in the hopes of selling for a profit.

This is especially true if you do not have the holding power. While laymen investors might not be aware and are eager to jump on the bandwagon, insiders tell us that it is a distortion of the market. Too much money is spent speculating on property, while the main core of the market cannot afford them at these prices.

REIT investment is one alternative to shield ourselves from the hassle and risks associated with direct property investment, especially during times when the property market is hot. It may not be as exciting as direct property investment, but if you ask me, I will always consider the risks first before the potential returns that come along with it. In this case, the risk from direct property investment is quite evident from various independent sources should an investor lack holding power.

I am obliged to tell you that I am holding long positions in most of the REITs listed above. The above should be construed as an invitation to buy. If you buy, I have nothing to gain and am not responsible for your profit or loss.

Lieu Ching Foo is the founder of the Malaysian personal finance blog – “LCF on Personal Finance” and is the co-founder of the “REITMethod” online educational program. He is also an advisor with the financial advisory firm Fin Freedom. - The Star