REIT Funds or Listed Property Trusts
REIT investments may enhance portfolio performance over time!
What are REIT funds? They are Real Estate Investment Trusts
Previously referred to as listed property trusts, this type of fund provides an opportunity for investors to gain exposure to the world’s listed real estate. The 70 REITs in Australia are known as A-REITs.
REITs were designed to provide investors with the opportunity to participate directly in the ownership or financing of real estate projects.
REIT funds own, and often operate, income-producing real estate such as shopping centers, office buildings, hotels, apartments, and warehouses.
Types of REITs
There are three main types ...
- listed public REITs trade on a stock exchange and are described as 'publicly traded'
- non-listed REITs are registered but do not trade on an exchange and are described as 'public reporting'
- private REITs are not subject to public disclosure, and have no obligation to be registered. They do not trade on any exchange and have no public market
REIT investment involves buying shares or units. Most REITs own land or buildings and make their money by renting available space to businesses.
REIT index funds and REIT etf (exchange-traded funds) follow passive management strategies. However, they represent distinctly different investment options.
The Attraction of REITs
Most investors buy REIT funds for their good dividends. Investing in REITs typically delivers annual dividend yields above 5%.
Even better, the cash usually keeps coming in regardless of whether a particular REIT's share price goes up or down.
The average yield paid out by most REITs is significantly higher than the tax-advantaged yield paid by most other common stocks.
Depending on the country of origin, REITs may provide access to tax concessions like depreciation allowances. Also, some of the tax associated with the rental income earned by REITs may be deferred.
Previous studies have shown that portfolios that contain REITs have tended to outperform those without REITs over the long haul.
One study compared the 30-year returns of portfolios that contain varying percentages of REITs. The results were noteworthy.
The 20% REIT portfolio beat the non-REIT portfolio by nearly half a percentage point a year, making a difference of over half a million dollars over 30 years from an initial investment of $100,000.
Even a 10% REIT portfolio beat the non-REIT portfolio by a significant amount.
A potential downside to REITs is that because of their hefty dividend payouts, these entities may only able to reinvest a limited amount of annual profits back into their businesses.
As a result, they typically grow their earnings at a slower-than-average rate. In some cases, this translates into slower dividend growth.
However, shares in listed REITs may experience capital gains if the value of the real estate portfolio increases in value.
A downside from my perspective relates to the valuations placed on the individual real estate contained in the REIT mutual funds portfolio.
Valuing large real estate is not an exact science and is open to manipulation by unscrupulous fund managers in order to lift the stock price.
Also, valuations take place infrequently and may not reflect current conditions such as rapid deterioration of the economy of a country.
This can create a valuation time bomb as the property valuations slowly catch up with the market decline. And it is these valuations that drive the stock price!
The global financial crisis has produced such a situation.
Some investors are now concerned that REIT funds may have seen their best days, even though the sector has delivered above-average returns for a long time.
As a value investor, I have not participated in REIT investments because I would have to rely on the real estate valuations of others. I am wary of real estate valuations.
With common stock, I can do my own calculation of fair value.
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