Diversify the REIT Way

Business - May 19th, 2006
Magellan Japan

Tel. 03-3769-5511

The benefits of real estate investments trusts

Consider REITs for high income
Many investors looking for high income turn to Real Es­tate Investment Trusts (REITs) as an alternative to bonds. REITs are a special form of security that trades like a stock on major markets, yet gives the investor the advantage of participating in large-scale commercial real estate projects. REITs were first introduced in the US in 1960 so average investors could participate in the growth of the commercial real estate market without committing large sums of money in illiquid investments. It is also now possible to invest in a fund of funds collective in­vestment to diversify risk even further.

REITs payout
REITs must pass 90 percent of their taxable income to shareholders. In exchange, they pay no corporate income tax. REITs invest in, and in most cases, actively manage large commercial real estate projects. These range horn apartments to shopping centers to office complexes to hospitals and a variety of other commercial projects. Most REITs specialize in a certain type of investment, such as office buildings or shopping malls.

Investor benefits
Investors benefit in several ways from REITs:
– Income from rent is passed through to shareholders.
– As the real estate appreciates in value, the REIT be­comes more valuable and its share price may rise.
– REITs can offer predictable income streams because of long-term lease agreements with tenants.
– Because REITs trade like stocks, you can get into and out of them with ease, unlike limited real estate part­nerships or other forms of real estate ownership.
– Investments in large commercial real estate projects are outside the reach of most investors except through vehicles such as REITs.

Risks of REITs
As with any investment, there are risks associated with REITs that investors should be aware of.

Most REITs focus on particular types of commercial development, such as apartments or office buildings. This concentration leaves them vulnerable to a down­turn in this particular sector of real estate.

Investors should also examine the location of the REIT’s projects. A high concentration of development in one community or geographic region may leave it vulnerable to a downturn in that area’s economy.

Your best bet is to invest in more than one REIT and choose absolutely different real estate sectors. Also, make sure the REITs are in different geographic locations. For example Japan, Singapore, Hong Kong, South Korea, Malaysia, Costa Rica, France, the United Kingdom, Germany, Belgium and Turkey have intro­duced, or are considering introducing REITs. Steve Carroll, Co-Chief Investment Officer, CBRE Global Real Estate Securities says, “With a global portfolio you have a bigger investor universe with a potential for higher returns as potential international REIT markets don’t move in tandem. Over-weighting cer­tain sub-regions can improve your overall returns and, surprisingly, lower your volatility.”

REITs are worth a look as part of your portfolio if you need current income and you want to diversify your portfolio. For most investors, REITs should be no more than 20-25 percent of your fixed-income portfolio or 10-15 percent of your total investment portfolio.