[Practical Finance] REITs Investment with Annual 7% Yield and Monthly Dividends Possible

REITs Investment Emerging as a 'Stable Income Source'
Interest Rate Cuts and Policy Support Make It the 'Right Time to Invest'
Several ETFs Also Offer Monthly Dividends

The REITs (Real Estate Investment Trusts) market, which had been quiet for a while, is heating up. This is because the attractiveness of REITs investment is being re-evaluated due to expectations of interest rate cuts in the U.S. in the second half of the year. Generally, when interest rates fall, the financing costs for REITs decrease. As a result, the yield on the included real estate assets is highly likely to rise. Moreover, with the amendment to the Real Estate Investment Company Act, known as the 'REIT Dividend Expansion Act,' expected to be promulgated in August, there is talk that it is an opportune time to invest. The amendment includes provisions that prevent valuation losses arising from the underlying REIT assets from being deducted from the dividend limit.

According to the Korea Exchange on the 24th, the 'KRX REITs Top 10 Index,' composed of the top 10 REITs by market capitalization listed on the domestic stock market, stood at 854.73 as of the 22nd. This is a 16.71% increase compared to the lowest point of 732.21 on October 23 last year. It is the first time in about a year since June 2023 that this index has reclaimed the 850 level. Despite being dividend stocks with relatively small price fluctuations, the index slightly outperformed the KOSPI's rise of 16.36% over the same period. Being fundamentally dividend stocks, the biggest advantage is that investors can enjoy not only capital gains but also stable dividend income. According to the Korea REITs Association, the dividend yield of domestic listed REITs last year was 7.40% per annum, nearly three times the average dividend yield of the KOSPI market at 2.72%.

REITs are products that collect funds from investors to invest in real estate. They distribute rental income or capital gains as dividends. To be exempt from corporate tax, they are required to return more than 90% of distributable profits to shareholders. Direct investment requires a large amount of capital, but since REITs are indirect investments, small investments are possible at around 5,000 KRW per share based on the public offering price. This means that even with just 1 million KRW, one can experience being a 'building owner' of a large office building in the metropolitan area. It is an investment product suitable for investors who want to enjoy stable dividend income rather than short-term capital gains.

Capital Gains and Dividend Income: 'Catching Two Rabbits'

[Image source=Yonhap News]

There are two main ways to invest in REITs: listed REITs and unlisted REITs. Listed REITs are those registered on the stock market, while unlisted REITs are not listed. Listed REITs can be invested in through securities firms just like regular stocks. As of May, there are 375 managed REITs domestically, of which 24 are listed. As of the 22nd, SK REITs leads with a market capitalization of 1.3561 trillion KRW. Following are ESR Kendall Square (1.0314 trillion KRW), Lotte REITs (855.2 billion KRW), JR Global REITs (769.8 billion KRW), and Shinhan Alpha REITs (566.5 billion KRW).

The REIT with the highest stock price increase since the beginning of the year is ESR Kendall Square REIT, which rose 30.81%. According to the Korea REITs Association, the expected annual dividend yield based on recent dividends is 5.66%. It is also the only listed REIT included in the portfolio of the National Pension Service, the largest institutional investor in the domestic stock market, holding more than 5% of shares. The National Pension Service's stake is 5.01%. This REIT is a pure logistics REIT that was listed in December 2020. It has incorporated a total of 18 logistics centers as assets, including 16 in the metropolitan area and 2 in the Yeongnam region. Compared to overseas markets, where there is talk of a 'commercial real estate crisis,' the fact that it invests 100% in the relatively stable domestic market is highlighted as an advantage.

SK REITs (26.45%), Shinhan Seobu T&D REITs (15.90%), Aegis Value REITs (13.04%), KB Star REITs (12.86%), Mirae Asset Global REITs (11.75%), NH Prime REITs (11.25%), Lotte REITs (10.69%), and Koramco Wonder REITs (10.16%) have also recorded double-digit growth rates this year. Among them, NH Prime REITs has an expected dividend yield of 17.78%, and the other seven REITs also exceed 5%. These are representative REITs that allow investors to enjoy both capital gains and dividend income simultaneously. Listed REITs pay dividends 1 to 4 times a year.

'Monthly Dividend Trend' Riding K-REITs ETFs

One of the hottest keywords recently in Exchange-Traded Funds (ETFs) is monthly dividends. This means changing the payment frequency from quarterly to monthly. It has gained great popularity among individual investors because it provides predictable monthly cash flow. Listed REITs can also be invested in through ETFs, and products offering monthly dividends are emerging one after another. The number of domestic REITs ETFs, so-called K-REITs ETFs, was only three until last year, but with two more launched this year, the total has expanded to five. The total net asset size has also more than doubled from around 300 billion KRW to 700 billion KRW.

First, Mirae Asset Global Investments opened the door by converting its 'Tiger REITs Real Estate Infrastructure ETF (Rebuin ETF)' to a monthly dividend product in November 2022. In February this year, Hanwha Asset Management's 'ARIRANG K-REITs ETF' switched to monthly dividends. In March, Samsung Asset Management launched the 'KODEX Korea Real Estate REITs Infrastructure ETF,' and in April, Woori Asset Management launched the 'WOORI Korea Real Estate TOP3 Plus ETF,' both as new monthly dividend products. If Kiwoom Asset Management's 'Heroes REITs Aegis Active ETF,' which is currently pursuing a dividend frequency change, also switches, all major domestic K-REITs ETFs will become monthly dividend products.

Looking at the portfolios of the five K-REITs ETFs, except for Macquarie Infrastructure, the largest and second-largest REITs by market capitalization, SK REITs and ESR Kendall Square REIT, naturally have the largest weights. The Tiger REITs Real Estate Infrastructure ETF has the simplest structure, with the underlying index adjusted according to market capitalization and other criteria. WOORI Korea Real Estate TOP3 Plus is characterized by excluding overseas asset-based K-REITs from its underlying index. Domestic REITs mainly hold office buildings, logistics centers, and retail assets, with major office vacancy rates being very low at under 5% compared to overseas. On the other hand, last year, office vacancy rates in major U.S. cities reached 19.6%, and major European cities recorded vacancy rates around 8%.