The nation’s real estate investment trust (REIT) market may have peaked, but its global counterparts are poised for growth.
China plans to include REITs on the Shanghai Stock Exchange as a way for investors to access more financial products. Zhu Congjiu, general manager of the Shanghai Stock Exchange, said the move would allow investors to profit from China’s booming real estate market and diversify risks.
China is not alone. REITs recently have been introduced in France, Japan and Singapore. Earlier this year, the United Kingdom introduced REITs, while Italy and Germany are expected to follow suit by the close of 2007.
REITs debuted in 1960 under the Dwight D. Eisenhower administration. The government’s goal was to make large-scale commercial properties available to every investor. In 1961, six REITs were created. Today, there are more than 300, two-thirds of which are publicly traded.
Like mutual funds that allow small investors to buy stocks, individuals can invest in REITs by purchasing shares directly or by investing in a fund that specialize in real estate.
In return, REITs distribute 90 percent of their income to shareholders by year-end. REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some will invest in one area of real estate or in one region, state or country. Investing in REITs is a liquid, dividend-paying way of participating in the real estate market.
Trusts can be publicly or privately held. Public REITs may be listed on stock exchanges like shares of common stocks. As a result, they offer investors an efficient way to invest in commercial real estate. They typically offer attractive yields and superior liquidity to investing in property directly.
Major Players
While available since the 1960s, REITs began to set records in the early 1990s. Consider this: In 1991, REITs invested less than $10 billion in equity market capitalization. Today, that number is $300 billion.
Like the run-up in stocks during the 1990s, investors have been attracted by strong returns. As of July 30, U.S. REITs in the Russell 3000 Index returned an annualized 12.2 percent over the past decade. Since 2003, domestic REITs’ annualized return has been more than 15 percent. Those returns incorporate the major correction in the domestic REIT market that started in February, when they were down nearly 22 percent from Feb. 1 though July 31.
It’s no secret that REITs have become major players in the real estate industry. Smaller real estate firms have complained that REITs – with their access to instant cash – spurred the recent run-up in commercial property prices nationwide. In addition, the mom-and-pop real estate firms say they can’t compete when it comes to buying properties because REITs can close a deal in days as opposed to weeks.
Blackstone Group’s buyout of Equity Office Properties Trust for $39 billion in February ranked as the biggest takeover of a real estate company and one of the largest private equity deals ever. Fueled by strong demand from private equity real estate buyers, the transaction capped a merger and acquisition trend that has dominated the REIT market since 2005.
Much of the gains in REITs last year came in the second half, according to the National Association of Real Estate Investment Trusts. REITs had a one-year return of 34.45 percent. The first two quarters of 2007 had mixed results, due the credit crisis that commenced in the first quarter.
Still, opportunities for domestic real estate investing are becoming more limited as a result of consolidation and the number of REITs. While merger and acquisition activity is a positive sign of a dynamic marketplace in any industry, concentration in the U.S. REIT market is increasing. Last year, there were 18 deals. So far in 2007 there have been about a dozen, worth a combined $100 billion in equity value. If that trend continues, the emergence of China into the REIT arena could be the next big thing.
Shanghai’s entrance into the REIT world comes on the heels of a study by the Urban Land Institute and PricewaterhouseCoopers that said it is one of three most promising Asia Pacific cities for real estate investment prospects. The report also named Singapore and Tokyo. Shanghai, which topped the list for investment prospects, edged up from its second-place ranking last year.
Despite its characterization as an elite city for the real estate industry, concern was expressed over a growing oversupply of some properties in Shanghai. The greatest number of “buy” recommendations went to the industrial/distribution sector; 67 percent of respondents advised buying those properties while 22 percent advised holding. Less than 11 percent recommended selling industrial/distribution properties.
“As the years go by, Asia Pacific property markets will integrate more fully with the global economy and, just as importantly, global property capital markets,” the report said. “If the quality and quantity of research, business intelligence and transparency improve, then the atypical puzzles and learning curves of the marketplace will be replaced with maturity.”
David Sandison, a tax partner at PricewaterhouseCoopers in Singapore, was bullish on the Pacific Rim. “It is expected that even greater amounts of capital will be flooding Asia Pacific real estate markets in 2008,” he said. “The real challenge for investors will lie in finding the right assets against the backdrop of yield compression and scrutiny by regional governments and tax authorities.”
Common Questions About REITs
Q: What is a REIT?
A: A REIT is a company that owns and, in most cases, operates income-producing real estate, such as apartments, shopping centers, offices, hotels and warehouses. Some REITs also engage in financing real estate. The shares of many REITs are traded, usually on a major stock exchange.
Q: In what types of properties do REITs invest?
A: REITs invest in a variety of property types, including those listed in the previous question. Most REITs specialize in one property type only, such as shopping malls, self-storage facilities or factory-outlet stores. Health care REITs specialize in health care facilities, including acute care, rehabilitation and psychiatric hospitals, medical office buildings, nursing homes and assisted living centers.
Q: Who determines a REIT’s investments?
A: A REIT’s investments are determined by its board of directors or trustees. Like other publicly traded companies, directors are elected by, and responsible to, the shareholders. In turn, the directors appoint the management personnel. As with other corporations, REIT directors are typically well-known and respected members of the real estate, business and professional communities.
Q: Who invests in REITs?
A: Tens of thousands of individual investors own shares of REITs. Other typical buyers of REITs are pension funds, endowment funds and foundations, insurance companies, bank trust departments and mutual funds. Investors typically are attracted to REITs for their high levels of current income and the opportunity for moderate long-term growth. Those are the basic characteristics of real estate. In addition, investors looking for ways to diversify their investment portfolios beyond other common stocks as well as bonds are attracted to the unique characteristics of REITs.
Q: Why should I invest in REITs?
A: REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks are likely to be somewhat less than the returns of higher-risk, high-growth stocks and somewhat more than the returns of lower-risk bonds.
Source: National Association of Real Estate Investment Trusts
