Is REIT a Risk-Free Investment?

Is REIT a Risk-Free Investment?

The answer is NO.

REIT might be a lower risk investment relative to other investment options. But it does carry certain layer of risk factors. Let's talk about price risk which refers to the fluctuation in REIT's market prices.

Imagine if you have bought into IGB REIT in May 2013 at around RM1.45, the price nose-dived into RM1.15 level in early 2014, translating into capital loss of 20%, investors who thought REIT is a risk-free investment, will be in for a rude awakening during that period of time!

Source: Bursa Malaysia

The decline in prices between May 2013 to early 2014 shows that REIT is not immune to external noises. What happen back then was due to US Central Bank’s announcement to gradually remove the money printing policy. Recalled that US has embarked on “money printing” measure after Subprime Crisis in order to spur US economic growth. The money printing measure has eventually "ended".

One of the Possible Factors that Cause the Plunge in REIT's Prices

Investors were worried that when US Central Bank remove the money printing measures gradually, it may signal that US is confident of its economic recovery, hence capital may flow out from Emerging Market (EM) to US as stronger economy would lead to stronger USD and higher interest rate which would make it attractive for foreign investors to move its capital from EM to US. Hence, it may cause domestic REITs to be less attractive unless the prices decline to a level that market deem attractive again.

Hence, fluctuation in REIT's prices is something that investor should anticipate.

The purpose of this sharing is to articulate that as long as the underlying properties that form the REIT continue to do well i.e. rising rental income and distributable profit. The market price of the REIT would eventually reflect the earning power of the REIT. 

Yes, it is not a risk-free investment, but investor who invests into good REIT at good price would have improved the chances of winning.

Despite the plunge in IGB REIT’s prices as discussed above, Mid Valley and Gardens Mall continue to perform well and distribute rising amount of dividends. People still went to the malls and SHOP!

The End Result?

Rising profitability will increase the value of the REIT and eventually, translate into higher market price in the long run.

Not forgetting, IGB REIT’s prices scaled new high in 2H 2016.

Note: The REIT mentioned above is for illustration purposes only.