Real Estate Investment Trust
Investment in real estate has become very popular over the few last years. There's the option of investing directly in real estate oneself, or through a Real Estate Investment Trust (REIT). This article will explain what REITâ€™s are -- first the advantages and disadvantages over other investment tools, and then REITâ€™s as specific to Asia.
Introduction in real estate investment trusts and legal requirements.
REIT stands for Real Estate Investment Trust, a company that invests its assets in real estates holdings. An REIT invests in real estate through property or mortgage. These properties will then be let to individuals or companies. Buying an REIT works the same as buying stock; it represents ownership of a business. The difference is that, instead of stocks and bonds, your portfolio consists of land, buildings, and other forms of real estate.
There are certain requirements for an REIT. The most important ones are listed here:
First, an REIT has to pay out at least 90% of its earnings after tax as dividend to the shareholders.
Second, there is a minimum requirement of a hundred shareholders.
Third, the â€œ5/50â€ rule; five shareholders can't own more than 50% of the outstanding shares.
Law requires an REID have 3 or more properties in the portfolio which are not owner-occupied.
Furthermore, there are two requirements concerning the asset pool and income for Real Estate Investment Trusts. At least 75% of the total assets must be in real estate (including mortgage), government security, or cash. As for the income, at least 75% should come from rent, mortgage, or from selling a property.
The biggest advantage of an REIT is that itâ€™s a tax transparent investment tool. REITâ€™s donâ€™t have to pay corporate income tax over the dividends they pay to their shareholders (which is at least 90%). This means that as a shareholder you will avoid double taxation. Keep in mind that REITâ€™s do pay corporate income tax over the percentage that is left (10%), which they will use to reinvest in their business.
Another advantage is that there is no minimum investment amount required to invest in REITâ€™s.
REITâ€™s are in general safer than normal stocks since they donâ€™t react so greatly to the changes or correction in the stock market (especially in times of a recession) and because of the high dividend yields.
Another advantage of an REIT is that itâ€™s a very liquid tool; you can buy and sell them like stocks.
REITâ€™s have had an impressive rate of return over the past few years, an average of 5% to 7%. This is much higher than normal stocks.
Even though the rate of return for REIT's is higher than stocks, they tend to grow at a slower rate because of the 90% dividend paid to shareholders, so there is less money to reinvest in the company. Furthermore it is important to understand that this dividend, as in most businesses, is not guaranteed.
Also, it is better to have experience in the real estate market before investing in an REIT. Choosing the right REIT for your needs can be a challenging task. But even with prior experience, investing in the real estate market -- with or without an REIT -- can be a risk.
Another disadvantage is that it is difficult to estimate the share price of an REIT, and as an investor there is the risk the share price may have been over-valued.
REITâ€™s in Asia
Real Estate Investment Trusts are a new phenomenon in China, emerging in Asia in 2001 with Japan and Singapore as market leaders. (The first Chinese REIT was listed on the Hong Kong stock exchange market as recently as December 2005.) Since then they have been very successful, especially in Japan, Singapore, and Hong Kong. This is due mainly to huge capital growth. REITâ€™s are a very good way to enter the real estate market while spreading the risk of investment among several shareholders.
When investing in REITâ€™s an investor is exposed to the rise and fall of rental incomes. While there is a rapid growth of new buildings in China, there have to be enough tenants to fill them in order to earn back the dividend. Property values in China are also growing due to a higher commodity price, which can mean more risk for investors. Another important issue to keep in mind is the unpredictable policy shifts of China's regulators.
A banking source said last month that â€œSingapore developer CapitaLand Ltd. plans to raise about $200 million by spinning of a real estate investment trust of Chinese shopping centersâ€. The source told Reuters that the listing on the Singapore stock exchange would raise "roughly" $320 million. JPMorgan will underwrite CapitaLand's China mall REIT.
A common mistake when investing in REITâ€™s is to only look at the dividend return. As said before the dividend yield is never certain so this could end up in a big disappointment.