Friday, October 27

Overview of Investment Product: REIT

There have been a big wave of REITs from Asia in the last couple of years, and we expect to see new ones springing up from UK to India to Israel. What exactly are they? and how are they compared to other types of investments?

What is REIT?

  • REIT, or Real Estate Investment Trust, was created by the US Congress in 1960 to give general public an opportunity to invest in large-scale commercial properties. The structure has since replicated in many countries around the world.
  • REIT is an entity set up to hold a portfolio of real estate properties (can think of it as a mutual fund). The entity makes money by receiving rental income from these properties, and to a lesser extent, selling properties for capital gain.
  • REIT is required by law to distribute at least 90% of its taxable income to its shareholders as dividends. In return, it pays none or little income tax.

Global development of REIT

North America and Australia are mature REIT markets with REITs capturing 95%+ of total property markets. Meanwhile, Europe and Asia are emerging, with REITs capturing 27% and 15% of total market respectively.

Fun fact: timeline of the passage of REIT legislation around the world

  • 1960s: USA, Netherlands
  • 1970s: Australia
  • 1990s: Belgium, Turkey, Greece, Canada, Brazil
  • 2000s: France, Japan, Singapore, Hong Kong, Thailand, Taiwan, South Korea, Malaysia, Mexico
  • Expected: UK (Jan 2007), Germany, India, Israel

REIT vs Property company stocks

  • Tax efficient. In general, REIT pays little income tax under the mandatory 90+% dividend payout policy. (note that while this is the case in US, it may or may not be applicable to specific countries)
  • Diversity: While you can only buy a couple of houses or a handful of property stocks, you can buy a unit of REIT which comprises of hundreds of property investments.
  • Stable income: since REIT is a portfolio of real estate properties and the income stream is mostly in the form of rents, the volatility of this investment is much lower.
  • But less explosive growth potential: Because of the 90% dividend payout policy, a REIT may not have enough cumulated capital to make substantial property investment for further growth, thus limiting the ability to maximize a booming property market.

REIT vs other non-property investments

  • Diversification: In general, REIT and other property investment have a low correlation to the other asset classes.
  • Inflation hedge with income: as property prices and rents rise with inflation, REIT and other property investments can protect your investments from losing value due to rising prices.

What to watch out for

  • We have seen a few REITS promising to pay a large dividend yield in the first 1-2 years as a way to attract investors. For example, the dividend could be >100% of its normal income stream, financed by a loan from the parent company.
  • While tricky, the company does fully disclose the information (using the tiniest font). Therefore, investors have to read the fine lines and see if the dividend yield promised in the first few years can be sustainable long-term.

Further reading

  • Reita (based in UK) provides a wealth of information on REIT.


Anonymous Mike said...

any reits for mainland China?

Friday, March 23, 2007  

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