REITs Explained: A Beginner’s Guide to Real Estate Investment Trusts in Malaysia

Real estate is a key asset class in any investment portfolio. Traditionally, before the introduction of Real Estate Investment Trusts (REITs), investors had limited options to gain exposure to the real estate sector—they either had to buy physical properties or invest in property stocks. Both options required significant capital, making real estate investment an unattainable goal for many.

Today, REITs offer a more accessible and affordable alternative. Instead of purchasing entire properties, investors can now own fractional shares of large-scale commercial real estate—such as shopping malls, hotels, office buildings, and industrial properties—by investing in REITs. This allows them to enjoy rental income distributions and potential capital appreciation without the financial burden of direct property ownership.

For many Malaysians, buying property remains a challenge, with even so-called "affordable" homes priced upwards of RM400,000. The rising cost of real estate has made property investment a distant dream for many. However, REITs provide a viable solution, enabling investors to benefit from the real estate market with a much lower capital outlay.

With REITs, investors can earn stable income through dividends while gaining exposure to professionally managed, high-quality real estate assets. Whether you're a beginner investor looking for a low-cost entry point into real estate or a seasoned investor seeking portfolio diversification, REITs present an attractive opportunity in Malaysia’s evolving investment landscape.

What exactly is a Real Estate Investment Trust (REIT)?

A Real Estate Investment Trust (REIT) is an investment vehicle that allows individuals to own shares in income-producing properties without purchasing them outright. These properties, which include shopping malls, office buildings, hotels, warehouses, hospitals, and industrial facilities, are managed by professionals and listed on the Bursa Malaysia stock exchange, making them accessible to everyday investors.

By pooling funds from multiple investors, REITs invest in large-scale real estate ventures. In return, investors receive regular income distributions, often paid quarterly or semi-annually, generated from rental income, property management fees, and potential capital gains from the properties within the REIT’s portfolio.

One notable example is Pavilion REIT, which manages prominent assets such as the Pavilion Kuala Lumpur Mall. Investors in Pavilion REIT benefit from rental income earned by the mall’s tenants, providing a steady income stream without the need to own the entire property.

Here are the 19 REITs listed on Bursa Malaysia:

How safe is REIT?

To ensure transparency and investor protection, REITs must comply with the Guidelines on Listed Real Estate Investment Trusts set by the Capital Markets and Services Act 2007 for listing on Bursa Malaysia. Additionally, all REITs seeking to be listed on Bursa Malaysia require approval from the Securities Commission under Section 212 of the Capital Markets and Services Act 2007.

This regulatory framework ensures that REITs operate within clearly defined rules, offering investors a reliable and well-governed investment option in Malaysia's growing real estate market.

How REIT works?

A Real Estate Investment Trust (REIT) operates through a structured ecosystem that connects investors, properties, and professional managers. Here’s a breakdown of how REITs work:

1. Investors and unit holders

REITs pool funds from various investors, including cornerstone investors, institutional funds, and retail investors. To ensure broad participation, at least 25% of the REIT’s units must be held by at least 1,000 unit holders, with no single vendor holding more than 75%. Investors become unit holders, owning shares of the REIT and receiving distributions from its income.

2. REIT management and trustees

A REIT Management Company is appointed to oversee the REIT’s operations, including property acquisitions, tenant management, and financial performance. In return, the management company earns management fees from the REIT. A trustee acts on behalf of the unit holders to ensure that the REIT is managed in their best interest. The trustee safeguards the REIT’s assets and is compensated with trustee fees for their services.

3. Property management and assets

The REIT invests in various income-generating properties such as malls, offices, industrial facilities, and hotels. A Property Management Company is often hired to handle the day-to-day operations of these properties, including maintenance, leasing, and tenant relations, in exchange for service fees.

4. Income distribution to investors

The rental income and fees collected from the properties are pooled into the REIT. After deducting management, service, and trustee fees, the REIT distributes the remaining income to unit holders as dividends. Malaysian REITs are required to distribute at least 90% of their income annually to maintain their tax-exempt status.

Benefits of investing in REITs in Malaysia

Investing in Real Estate Investment Trusts (REITs) offers a variety of advantages, making them an attractive option for both new and seasoned investors. Here’s why REITs have become a popular choice in Malaysia’s investment landscape:

1. Affordable entry point into real estate

One of the most significant benefits of REITs is their affordability. Unlike purchasing physical property, which often requires hundreds of thousands of ringgit, REITs allow investors to enter the real estate market with minimal capital. 

For example, some REIT units on Bursa Malaysia are priced as low as RM0.290 per unit, meaning you can start investing with less than RM100. This accessibility makes REITs an ideal option for beginners who want to build a property investment portfolio without substantial financial outlay.

2. Simplicity compared to traditional property investment

Investing in REITs eliminates the complexities of direct property ownership. There’s no need to worry about securing home loans, managing tenants, or handling legal paperwork. 

REITs are traded on the stock exchange, offering the benefits of real estate investment without the lengthy processes associated with buying and selling physical properties, which can take months or even years to complete.

3. High liquidity for flexible investing

REIT units can be easily bought and sold on Bursa Malaysia, providing high liquidity compared to physical properties. 

Investors can convert their REIT holdings into cash almost instantly through online trading platforms, unlike selling a house or commercial property, which often involves extended timelines and multiple stakeholders.

4. Consistent income with attractive dividend yields

REITs are known for their steady income streams through regular dividend payouts, typically ranging from 5% to 7% annually. To maintain tax-exempt status, Malaysian REITs must distribute at least 90% of their earnings to unit holders, ensuring that investors receive consistent returns. 

These yields often outperform rental returns from physical properties, making REITs a lucrative investment choice.

5. Professional management for optimized returns

Each REIT is managed by experienced property professionals who oversee property maintenance, tenant management, and asset optimization. 

This means investors benefit from expert management without the hassle of direct involvement, ensuring that the properties generate maximum income and value over time.

6. Tax advantages that enhance profitability

Malaysian REITs enjoy tax exemptions on property acquisitions and disposals, including stamp duties and Real Property Gains Tax (RPGT). 

These savings contribute directly to the REIT’s profitability, allowing for higher distributions to investors and making REITs a tax-efficient investment option.

7. Diversification across premium real estate assets

Investing in REITs provides exposure to a diversified portfolio of high-quality real estate assets, including retail malls, office buildings, industrial warehouses, and healthcare facilities. 

What kind of returns can be expected from REITs?

 Investors in Real Estate Investment Trusts (REITs) can expect returns in two primary forms:

Income distribution

REITs are designed to generate regular income distributions, similar to dividends, for their unit holders. These distributions are primarily derived from the rental income collected from tenants occupying the REIT’s properties. The amount distributed is based on the distribution policy outlined in the REIT’s deed, with Malaysian REITs required to distribute at least 90% of their net income annually to qualify for tax exemptions. Investors typically receive these payouts quarterly or semi-annually, providing a steady stream of income.

Capital gains

In addition to income distributions, investors may also benefit from capital gains when the market price of the REIT units appreciates over time. As the value of the underlying real estate assets increases due to property appreciation, higher rental yields, or improved management, the price of the REIT units may rise, allowing investors to sell their units at a profit.

With the potential for stable income streams and capital growth, REITs offer an attractive investment option. Here’s how REITs stack up against some common investment options in Malaysia:

How to invest in Malaysian REITs

Investing in REITs in Malaysia is a straightforward process, much like trading stocks on Bursa Malaysia. Here’s a step-by-step guide to get started:

1. Open a Central Depository System (CDS) account

A CDS account is essential for holding and managing your REIT units, similar to how a bank account holds your money. You can open a CDS account through any authorized brokerage firm in Malaysia.

2. Set up a trading account

Once your CDS account is ready, you’ll need a trading account with a broker or remisier. This account will allow you to buy and sell REIT units on Bursa Malaysia. Many brokerage firms offer online trading platforms, making the process more convenient and accessible.

3. Fund your account

Before making any trades, you must deposit funds into your trading account. This capital will be used to purchase REIT units.

4. Buy and sell REIT units

With your accounts in place, you can start buying and selling REIT units during Bursa Malaysia’s trading hours. Just like stocks, REIT units are traded in real-time, allowing you to monitor prices and execute trades through your broker’s platform.

5. Pay transaction fees

When investing in REITs, you’ll incur several fees, including:

• Brokerage commission (charged by your broker for facilitating the trade)
• Stamp duty (imposed on share transactions)
• Clearing fees (charged by Bursa Malaysia for trade settlement)
• Sales and Service Tax (SST) where applicable

What are the performance indicators of REITs?

When evaluating Real Estate Investment Trusts (REITs), investors rely on key performance indicators to assess their profitability, efficiency, and potential returns. Here are the most important indicators to consider:

1. Distribution yield

The distribution yield reflects the annual income earned from a REIT relative to its market price. This is often published in financial reports and business news.

Formula:

Distribution yield = Income distribution paid to a unit holder/ REIT’s market price or purchase price

A higher yield indicates better income returns, making it a key factor for income-seeking investors.

2. Net asset value (NAV)

NAV represents the value of a REIT’s underlying real estate assets after deducting liabilities. It gives investors an idea of the REIT’s intrinsic value.

A REIT trading below its NAV might be undervalued, while one trading above could signal strong market confidence.

3. Management expense ratio (MER)

The MER measures the efficiency of the REIT’s management by comparing its operating expenses (such as management fees, property maintenance, and administrative costs) to its NAV.

A lower MER is preferable, indicating that more income is distributed to investors rather than being consumed by expenses.

4. Total return

Total return combines the REIT’s price appreciation with the income distributions received during a specific period.

This metric helps investors understand the overall profitability of their REIT investment over time, making it an essential indicator for long-term performance evaluation.

Types of REITs in Malaysia

The Malaysian REIT market offers investors a diverse selection of options, broadly categorized into two main types:

Conventional REITs

Conventional REITs invest in a variety of real estate sectors, including retail, commercial, industrial, hospitality, and healthcare properties. These REITs aim to maximize returns through rental income, property appreciation, and efficient management.

Examples of conventional REITs in Malaysia include:

• Pavilion REIT – Retail and office properties, including Pavilion Kuala Lumpur Mall.
• Sunway REIT – A diversified portfolio of retail malls, hotels, offices, and industrial properties.

Islamic REITs (i-REITs)

Islamic REITs, also known as i-REITs, comply with Syariah principles, ensuring that their investments and operations avoid non-halal activities such as alcohol, gambling, and interest-based financing. These REITs are overseen by Syariah advisory boards to ensure adherence to Islamic guidelines.

Examples of i-REITs in Malaysia include:

• Al-Aqar Healthcare REIT (ALAQAR) – Specializes in healthcare properties like hospitals and medical centers.
• Al-Salam REIT (ALSREIT) – Invests in retail, office, and industrial properties that meet Syariah compliance standards.

How to select a good REIT

Choosing the right Real Estate Investment Trust (REIT) is essential for maximizing returns and minimizing risk. Here are key factors to consider when selecting a REIT: