Understanding the Investment Fundamentals of Real Estate Investment Trusts (REITS). A part of the series "Sector Analysis: A Framework for Investors"

Joseph Wong    Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan
15 Apr 2019
Categories: Industry/Sector Analysis, General Market Analysis, Fundamental Analysis, Investment Management

Country or region: Asia Pacific (Overall)


The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 

REITs are vehicles that own and typically operate a portfolio of income-yielding real estate assets. Modelled along the lines of unit trusts, REITs allow for funds to be pooled from a group of investors. Such a structure provides retail investors with several advantages: a low-hurdle of entry and exposure to a diversified pool of real estate assets with a high level of liquidity, which would not otherwise be possible with direct investing. 

Most REITs are publicly listed, and declare above 90% of their earnings as dividends to fulfil certain benefits accorded to REITs by the local securities regulator. As such, REITs provide a stable source of recurrent income, which serves as a yield play rather than an investment avenue for reaping capital gains. We believe an effective and accurate fundamental analysis can help the retail investor determine if the recurrent income is stable and/or trending upwards over the long term. 

A REIT generally focuses on a specific category of property for investments.  Some common classifications of REITs include: Office & Commercial REITs, Retail REITs, and Industrial REITs.

To read more, download the full sector analysis for REITs with accompanying question bank below.

This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
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