What I like about REITs compared to other asset classes is that they are boring and easy to understand. Afterall, it is crucial for an investor to understand what he or she is investing in. As the legendary fund manager Peter Lynch said, “Never invest in any idea you can’t illustrate with a crayon”.

To recap, REITs earn rental income from a bunch of real estate and distributes that income to its shareholders in the form of (quarterly) dividends. As investors, we not only need the dividend to be maintained, we also need it to increase, at least in line with inflation but hopefully even higher. A REIT can do this by acquiring more income generating properties. But even if it doesn’t, it can still increase dividends by increasing the rent. The only way for this to happen however, is if the properties have pricing power – the ability to raise prices without reducing demand.

What gives a piece of property pricing power? Location, location, location. We all know that rents in Metro Manila are higher than just about anywhere else in the country but businesses still want to locate there. Narrowing it down, rents are higher in areas like BGC, Makati and Ortigas, but tenants are still willing to pay rent in those places. Even between buildings, a PEZA-accredited grade-A building would command a higher rent – and businesses are willing to pay that rent.

Whatever a particular REIT’s portfolio is: offices, malls or warehouses, the location of those properties and therefore pricing power will determine if a REIT can charge a higher rent every single year and subsequently increase its dividend per share. Rental real estate is not about who can offer the lowest price, its about location. As REIT shareholders, we indirectly own the properties that a REIT owns and I, for one, will choose a piece of real estate that has pricing power.