Real Estate Investment Trusts - REITs

A Real Estate Investment Trust is a security that sells like a stock on the major exchanges or may be a private placement sold under a Private Placement Memorandum (PPM). REITs invest in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate if exchange traded securities.

REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges thus providing liquidity.

REITs can be classified as equity, mortgage, or hybrid.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate or via private placement under a private offering. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country. Investing in exchange traded REITs is a liquid, dividend-paying means of participating in the real estate market.

Analyzing REITs

REITs are dividend-paying stocks that focus on real estate. If you seek income, you would consider them along with high-yield bond funds and dividend paying stocks. As dividend-paying stocks, REITs are analyzed much like other stocks. But there are some large differences due to the accounting treatment of property.

The key statistics to examine in a REIT are net asset value (NAV), funds from operations (FFO), adjusted funds from operations (AFFO) and cash available for distribution (CAD). In the recent period from 2008, REITs face challenges from both a slowing U.S. economy and the global financial crisis, which depressed share values by 40 to 70 percent in some cases. The current market is quite active and prices have rebounded substantially as investors chase yield

At the individual REIT level, you want to see strong prospects for growth in revenue, such as rental income, related service income and FFO. You want to see if the REIT has a unique strategy for improving occupancy and raising its rents. REITs typically seek growth through acquisitions, and further aim to realize economies of scale by assimilating inefficiently run properties. Economies of scale would be realized by a reduction in operating expenses as a percentage of revenue. But acquisitions are a double-edged sword. If an REIT cannot improve occupancy rates and/or raise rents, it may be forced into ill-considered acquisitions in order to fuel growth.

REITs have a well-developed regulatory presence in such countries as:

Australia, Brazil, Canada, Finland, France, Germany, Hong Kong, India, Japan, Philippines, Singapore, United Arab Emirates, United Kingdom, United States


Commonly referred to as S-REITs, there are currently 20 REITs listed on the SGX, starting with CapitaMall Trust in July 2002. They represent a range of property sectors including retail, office, industrial, hospitality and residential. S-REITs hold a variety of properties in countries including Japan, China, Indonesia and Hong Kong, in addition to local properties. S-REITs are regulated as Collective Investment Schemes under the Monetary Authority of Singapore's Code on Collective Investment Schemes, or alternatively as Business Trusts. S-REITs benefit from tax advantaged status.

Hong Kong

REITs have been in existence in Hong Kong since 2005, when The Link REIT was launched by the Hong Kong Housing Authority on behalf of the Government. Since 2011, there have been 9 REIT's listed. Hong Kong issuers' use of interest rate swaps, to improve initial yields, has deterred investors' interest.

The Bottom Line

REITs are real estate companies that must pay out high dividends in order to enjoy the tax benefits of REIT status. Stable income that can exceed Treasury yields combines with price volatility to offer a total return potential that rivals small capitalization stocks. Analyzing a REIT requires understanding the accounting distortions caused by depreciation and paying careful attention to macroeconomic influences.

As existing markets expand and REIT like structures are introduced in more countries, Olympia Capital Exchange expects to see the overall market growth of REITs at some ten percent per annum over the next five years, taking the market to over $1 trillion by 2020.

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