Common difficulties and how to avoid them

Real estate investment trusts (REITs) are a favourite asset class for income seeking investors looking for regular dividends. However, there are a number of difficulties regularly experienced by investors new to REITs, difficulties that are seldom addressed by trainers at public seminars. The following article details four of the main issues commonly faced by REIT investors.

Firstly, dealing with rights issues. REITs in Singapore have to distribute a minimum of 90% of net income to qualify for the relevant tax concessions. As such, it is very common for a REIT to raise funds by acquiring more properties or to refinance debt due to limited cash on hand. When REITs offer rights to existing unit holders, the rights will often be offered at a discount to the prevailing market price. The share price will most likely be adjusted downwards immediately after the announcement. There is also no way for retail investors to sell their current holdings immediately after the announcement is made. Subsequently, the investors are left with no choice but to either subscribe to the rights on offer, by injecting more cash, or are forced to sell the rights at an unfavourable price. If the investors do not have enough ready cash, or forget to subscribe to the rights, they will suffer a loss from their invested capital.