Amid recent volatile markets, many financial media are advocating investing in REITs. REITs became the synonym of high dividend income, downside protection, asset diversification, blah blah. However, the dark side of Reits industry is hardly mentioned.


REITs started to gain popularity since beginning of this century in Asia, but just like the ETF products, the benefits are oversold and the risks are undermined.

You may heard of common risks of investing in REITs such as market risk, income risk, leverage risk, etc. But if you pay some attention, you will realize that the managers’ and shareholders’ interest (especially for minor shareholders) are not always unanimous.

REITs industry is currently regulated under collective investment schemes under MAS. However, even MAS admitted the current regulation is not robust enough to prevent unscrupulous REITs managers from taking advantage of minority shareholders. And this will create two not so obvious but significant risks of investing in REITs

Risk #1: Conflict of interest between REITs unit holders and sponsors.

What just happened was the Keppel Land sold its entire stake in Ocean Financial Centre to K-Reit Asia for S$1.57 billion. Stakeholders had criticised both the timing and price of the plan, which may have been disadvantageous to K-Reit unitholders.

Moreover, the deal was approved at the shareholders’ meeting through a show of hands. In the show-of-hands system, each person, regardless of his number of shares, gets a single vote, while poll voting gives each shareholder voting rights depending on the size of the share.

Risk #2: REITs price decline due to share price dilution

You should also always bear in mind that REITs instrument is by nature a security traded in stock exchange. Investing in REITs is not as simple as buying the physical properties.

Because the stock characteristics of the REITs,  the shareholders of REITs are always at the mercy of the REITs managers. Whenever the managers need money for acquisition or upgrading, they issue rights or private placements. Share dilution is a constant risk when investing in REITs.

Take CapitaMall Trust for example, on Nov 1, it issued 139,665,000 New Units at an issue price of S$1.79 per New Unit in connection with the Private Placement, the share price tumbled from previous day’s high S$1.925 to as low as $1.775 on the next day. That is more than 8.4% drop in a single day!

These types of risks are hardly found in textbook explanation of risks. However, if you are investing in REITs, these are real issues you should monitor closely.

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About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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