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Ad / Disadvantages
Thursday, 15 October 2015 05:45

Advantages

Listed USA equity REITs have returned 12% pa for nearly 43 years since official data has been collected (1972). That's better than large-cap stocks, small-cap stocks, foreign stocks, bonds, commodities and every other asset class. Why have they outperformed so consistently? A big part of the answer is that REITs don't waste their earnings - they have to distribute dividends to shareholders, and ask for capital when they want to make investments. That's the REIT difference, and it has paid off for investors for a long, long time.

Assuming you decide to invest in (blue-chip) REITs, you can get a good idea of what income you will receive from your investment over the next 5- and 10-year time period because the compound annualized growth rate of the ‘best’ REITs combined also has out-paced the rate of inflation over the last 5-10 years, meaning that the income stream should cover a retiree's expenses just as well in the future as in the present. Furthermore, thanks to low transaction costs and the acumen of management to manage cashflow , REITs can outperform directly owning real estate over the long-term. But the biggest benefit is the immediate income; the long-term track record of dividend increases; the low-stress, hassle-free nature of REIT-driven income; and the liquidity that REITs provide.

Indirect Commercial Real Estate Investment

The obvious advantage for individual investors is that they can gain from the benefits of investing in otherwise unaffordable (mostly) commercial property, and corporate investors can avoid the disadvantages of direct ownership. REITs offer unit-holders a rate of return above CPI but below equities (as a rule of thumb); lower volatility than stocks or commodities (eg oil and gold); and perhaps most importantly, regular cash dividends (often paid Quarterly, like the rent), since REITs typically have to distribute 90%+ in order to be eligible for their preferable tax status. Furthermore, whilst governments can be said to be losing some tax revenue, countries are better able to obtain foreign-indirect-investment into their commercial real estate markets, adding transparency and a degree of stability as REITs aren’t short-term investors.

Counter-Cyclical

Since REITs are traded on stock markets they do suffer a bit from rising and / or falling with the larger "market index" but nonetheless demonstrate a relatively low correlation, since their sole under-lying businesses and ‘raison d’etre’ is to own real estate, which some research indicates is broadly counter-cyclical to equities, that enables some of the funds to diversify investment portfolios by adjusting their weightings between asset classes.

Steady Demand

There will always be demand for “good” buildings in “good" locations even if, in the extreme, that requires refurbishment, redevelopment or a change of use. That’s what makes investing in property attractive. As much as anything it is a good way of preserving cash, whilst also offering a decent upside, and low downside (REITs sell as well as buy).

Expert / Professional Managers

REITs specialise in real estate investment and management, be it offices, shopping centres, or hotels. Each is a bespoke discipline and learned over time, and professional qualifications and experience gained.

Diversification

Whilst investing in REITs / property should in itself only ever be to diversify part of a larger investment portfolio, one can also obtain a high degree of diversification within one’s REIT portfolio; from shopping centres to hospitals, care-homes, plantations, or wineries. These can be further diversified by geographical region and / country / continent. Differentiation is being different from your competitors in a manner that lets you serve your core customers better and more profitably. But just because a company has a better competitive advantage doesn't mean it's a blue chip. In REIT-dom the best of the best REITs - the blue chips - are all identified by durable dividends that provide a very predictable and reliable sources of income for investors.

Buy-to-Let & Home Ownership

One of the key investing principles is simplicity. Buying a house creates complexity and headaches. This complexity is completely unnecessary and inconsistent with intelligent investing principles. Buying a home creates unnecessary complications, doesn't produce worthy returns on investment, and narrows your diversification. Renting is a much more efficient and effective alternative to home ownership. Due to these reasons, a house has no place in anyone's portfolio. It is never a good idea to buy a house outright, let alone borrow money for it - Link.

Research from the Bank of Canada acknowledges that buying into a REIT historically out-performs the direct purchase of a condo for rent: "A medium term investment in a REIT of between 3-7 years yielded a total return of 78% against a 41% return on a single condo investment" - Link.

Disadvantages

Arguably, the biggest disadvantage of REITs is that they are not “sexy” enough, in the sense that nobody should expect a REIT to have a "steller" year. But that is rather the whole point, since what investors buy them for is less risk / a degree of certainty of income via the rental income stream. Similarly, companies that do have "steller" years can follow these up with "annus horribilius." Good buildings don't dissapear and don't beome almost worthless over-night. Nonetheless some REITs perform “better” than others over certain time-frames; carry less debt than others; or are disadvantaged by the prevailing marco and micro-economic conditions of a region or country (property goes in cycles in all countries), so it is important to be able to make informed decisions of the market (directly or indirectly).

 

Last Updated on Thursday, 15 October 2015 05:56