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Saturday, November 13, 2010

4 Questions About REITs Answered

INVESTMENT SPOTLIGHT



In a previous post, we caught a brief glimpse of Real Estate Investment Trusts or REITs and how it gives "small" investors a more affordable way of investing in real estate. Recently, the Philippine Stock Exchange released a primer about this new investment vehicle that's about to enter our market. Here are some of the more important things you need to know about REITs.

1. What exactly is it?

A Real Estate Investment Trust (REIT, pronounced as “reet”)  is a stock corporation created for the purpose of owning and managing income-generating real estate such as office buildings, residential condominiums, shopping centers, hotels, warehouses, hospitals, airports, and tollways. The Philippine REIT, under Republic Act No. 9856, otherwise known as the REIT Act of 2009, requires REITs to list its shares of stock on the Philippine Stock Exchange or PSE. The REIT distributes 90% of its distributable income to investors in the form of regular dividends and receives special tax considerations as an incentive.

REITs allow investors--especially small or retail investors--to participate in the ownership of one or more income-generating real estate. For property developers, REITs provide to ready capital which may be immediately used to finance new projects and investments.

2. What are the allowed activities and investments of REITs?

REITs are allowed to make investments in the following:
  • Real estate;
  • Real estate-related assets;
  • Managed funds, debt, securities, and listed share issued by local or foreign non-property corporations;
  • Government securities (issued in the Philippines and others);
  • Cash and its equivalent; and
  • Similar investments (see REIT Act IRR).


3. How do investors earn from owning REIT shares?

Owning REIT shares is like owning a hybrid fixed income and equity security. Since REITs have access only to a limited number and specific types of investments, earnings distribution in the form of dividends should be more reliable and stable than dividends paid by stock companies. Also, since REIT shares are freely traded in the market, investors can also benefit from capital appreciation when there is high demand for the shares.

4. What are the other advantages of investing in REITs?

Through REITs, investments in real estate become more affordable to small or retail investors. And since there is (presumably) a ready market for REIT shares, investments in REITs are more liquid than direct investments in real property.

Finally, because REITs offer features that are distinct from traditional investments like bonds and stocks, they can enhance an investor's portfolio through more effective diversification.