“REIT” Series - Introduction (1/3)

This article will be the first of a series of 3 focusing on Real Estate Investment Trusts (REIT). This first article will be an introduction to REITs, the following article will focus on key valuation metrics and the third article will focus on whether investing in REITs serves as a diversification tool.

REITs were first established in the US in the 1960s and have since been adopted in most developed countries and are increasing in emerging markets. REITs serve as investment vehicles which offer exposure to direct real estate to its shareholders which might not have otherwise been able to invest in. REITs own, manage, operate and acquire real estate on behalf of their investors and what distinguishes them from other real estate is that they are less likely to sell their assets. This is because REITs are required to operate their assets & generate income in order to return dividends to its shareholders.

In order to qualify as a REIT, the trust must adhere to certain rules. This will defer from country to country although most global REITs will have to comply with the following regulations (but not limited to):


How to Qualify as a REIT

90% of income to shareholders in the form of dividends

Fully transferable shares

100 shareholders after its first year as a REIT (US)

No 5 individuals can own more than 50% of the equity (US)

A minimum of 35% of shares must be public (UK)

75% of assets must be real estate

75% of income must be derived from rent or be real estate related

Must hold at least 3 separate assets

No asset can be more than 40% of total assets

Managed by a board trustees

No capital gains requirements



Advantages for investors Disadvantages for investors

Long Term Returns Rising interest rates

Strong and steady income Oversupply

Diversification (see article) Tenant risk

Inflation Hedge Economic risk

High liquidity

Transparency



To take full advantage of REITs, investors must pick the right REIT (as is the case with stocks and bonds). Investors must be wise in investing in regions and sectors with potential, as REITS often offer speciality investment vehicles focusing on regions and/or sectors. Each sector will have different economic drivers as summarised below:


Sector Economic Driver


Office Corporations

GDP

Business sentiment

Industrial Consumer Spending

Retail Sales


Malls / Shopping Centres Income

Consumer Spending

Population growth


Residential Interest Rate

Population Growth

Employment


Health Care Aging Population

Government



In addition, investors will need an understanding of the relevant valuation metrics and the diversification benefits (if any) that REITs provide. Valuation metrics and diversification will be discussed in the following articles. Investors also have the choice of investing through mutual funds or Exchange Traded Funds (ETF) as opposed to individual REITs. This provides investors with a more passive approach requiring little valuation skills and is likely to perform better as a diversification tool.

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“REIT” series - Key Valuation Metrics (2/3)

Following the previous article on an Introduction to Real Estate Investment Trusts (REIT), this article will be focusing on REITs key valuation metrics. REITs are not equities and are therefore valued

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