As I progressed into the 12th year of investment since my first REIT, I decided to pen a post on the 5 common mistakes REIT investors may make.
But instead of a theoretical piece (DO’s vs DON’Ts), I will pepper this post with personal examples of my Hits (gems) and Misses (painful lessons) drawing from the 20+ REITs I have invested in.
In case you missed my recent posts: |
Mistake #1: Chasing Highest Dividend Yield
One of the biggest mistakes REIT investors make is focusing solely on headline dividend yield.
A high yield may look attractive today, but it does not guarantee strong long-term returns. Likewise, a lower-yielding REIT should not automatically be dismissed.
Let’s look at two personal examples.
1. IREIT Global
I bought IREIT Global at IPO in 2014 for the projected 8% yield, with 4 freehold office buildings at strategic locations in Germany (Europe’s largest economy), with 100% occupied properties, mostly by blue chip or government-linked tenants.
However, the portfolio of four properties with high concentration of tenants (Top five tenants accounted for 90+% of revenue).
Expansion into Spain and France did not take off. Loss of a major tenant in 1 German property resulted in high vacancy, tried to convert vacant single-tenanted property into multi-tenanted property but it was hard to backfill.
Declining distribution per unit (DPU) for the past 7 years.
The result? My high 8% dividend yield crashed to 3.9% with DPU cuts over the years, sold at a painful loss of 53%!
2. AIMS Apac REIT
In contrast, AIMS APAC REIT initially offered a lower yield of around 5.4% when I bought it in 2016. Shrewd management at acquiring hidden gem properties or optimisation of under-utilised assets.
While the REIT started small, it expanded steadily and grew their dividends over the years.
What impressed me was management’s keen eye to optimise land use through redevelopment of older properties or asset enhancement initiatives to maximise land use intensity and securing long term tenants.
Ventured into built to suit properties for niche customers with locked in long leases. Recently, management also pivoted to data centre assets.
Today, my dividend yield on cost grew from 5.4% to 7.8%, not to mention the REIT share price grew by ~24%.
The lesson? Don’t blindly chase after the highest dividend yield. Neither should we look down on low dividend yield REITs.
In REIT investing, management quality, asset strategy, tenant resilience, and long-term growth matter far more than headline yield alone.
Mistake #2: Overconcentrating in One Single Asset
Another common mistake is over-concentrating on a single asset. For example, let’s compare two retail REITs.
Frasers Centrepoint Trust (FCT)
FCT owns a purely Singapore-based suburban retail portfolio (~$8.3 billion).
Suburban shopping mall giant with nine key assets in neighbourhoods and key transportation nodes (see image below) serving ~3 million catchment population.
Importantly, no single property contributes more than 25% of the portfolio, while the top 10 tenants account for less than 20% of total revenue. This creates a diversified and resilient income stream.
Starhill Global REIT
Starhill Global REIT owns ~S$2.8 billion worth of retail properties across Singapore, Malaysia, Australia, China, and Japan.
The majority of its properties (~62.5%) are also in Singapore but it is concentrated in only two assets – Wisma Atria and Ngee Ann City.
Both within the Orchard Road shopping belt and heavily reliant on tourists. In addition, Starhill’s top three tenants account for ~46% of their gross revenue.
Imagine if any of these top tenants decide to not renew their leases, it would adversely impact the REIT price and affect unitholders’ DPU.
Mistake #3: Not Understanding the Role of Rights Issues in REIT Growth
A lesser-known fact – REITs typically return 90% of earnings to unitholders.
Hence, with little retained earnings, when REITs require capital to acquire properties or asset enhancement initiatives (AEIs), REITs turn to investors for funding by issuing new REIT units through rights issue.
If unitholders are unable to participate in the rights issue, they risk diluting their unitholding with a shrinking DPU.
If investors participate, they need to fork out more money to purchase the rights to maintain their unit holdings and dividends.
However, if executed well and for the correct reasons (e.g. acquisition of strong properties to enhance the REIT’s income), rights issue can benefit unitholders.
Positive Example: Keppel DC REIT
Since its IPO in 2014, Keppel DC Reit carried out four rights issue exercises to fund acquisition of new data centres. I participated in all the rights issues.
While my purchase price averaged up from $0.93 (IPO in 2014) to $1.57; based on its current price of $2.27, that’s a capital gain of ~44%.
My DPU for Keppel DC also increased by ~57% from 2015 to 2026. Great use of investors’ monies through rights issues to grow total returns (capital gains + dividends)!
Unfortunately, not all rights issues lead to good outcomes.
Negative Example: IREIT Global
IREIT Global also IPO-ed in 2014, and carried out three rights issue exercises to fund acquisitions. I also pumped in money in all 3 rights issues.
However, its price tanked by ~74% from $0.88 at IPO (in 2014) to $0.23 (in 2026).
In addition, IREIT Global’s DPU tumbled by ~66% from in 2015 to 2026. NOT a pretty sight for loyal unitholders putting our hard-earned monies to support their rights issue!
Mistake #4: Treating REITs Like Bonds or Fixed Deposits
Although REITs provide relatively stable dividend income, investors should not treat them like fixed deposits or bonds
Unlike bonds or fixed deposits, where fixed interest is paid out and the capital will be returned to investors upon maturity, REITs are equity instruments with equal chances of capital appreciation or sustaining capital losses, or even dividend cuts.
Although REIT prices are usually more stable than stocks since REIT investors are paid passive income over the long run (compared to stocks when investors only make money when they sell), we should not mistake REITs as safer instruments like bonds or fixed deposits.
Mistake #5: Ignoring Interest Rate Risks
During the Covid pandemic, when interest rates were cut to zero, many investors piled into REIT investments, some even used leverage to buy beyond their means.
However, many did not realise that REITs performance is tied closely to the interest rate environment as REITs use substantial leverage for their operations and acquisitions.
However, many investors underestimated how sensitive REITs are to interest rates.
Hence, when interest rates were hiked fast and furious in 2022 and 2023, many REIT investors were adversely affected, especially those who invested in vulnerable REITs with high gearing and/or large amounts of floating-rate debt.
The lesson? Do not assume interest rates will always remain low. Always pay attention to a REIT’s debt profile, gearing ratio, and interest coverage.
While there is NO perfect REIT, if we can avoid the five big mistakes above, I believe we can all make money from REITs.
To your money and health,
Mr MoneyandHealth (Mr MH)
