Once restricted to billionaires and sovereign wealth funds, buying fancy buildings in the major capitals of the world is now more at reach to the everyman than ever before. That’s largely because of the proliferation of so-called real estate investment trusts, or Reits as they are better known.
With experts citing Reits as a low-risk, hassle-free yield, it could be the solution to the nervous property investor reluctant to sink their cash into a second home.
"You can do very well out of residential property but if you are talking about a good long-term, solid investment in property, giving a good yield from rent and a bit of capital gain, then Reits are a good option," says Dominic Whiting, an Abu Dhabi-based British author who has written two books on Reits including Playing the Reits Game.
Reits are essentially a mutual fund that buys properties, manages them and distributes rental yields to its shareholders.
Like stocks, these shares are bought and sold on major exchanges and can give you access to a wide range of properties that you would typically find it difficult to invest in alone – like a warehouse in Vancouver, a mall in Kuala Lumpur or student housing in the United Kingdom. They are becoming increasingly embraced by frontier market countries including Ghana, Nigeria and Pakistan.
“They are perfect if you are looking to build a nest egg for retirement,” adds Whiting. “If you put a little bit of money into Reits each month and keep them over the long term, you should end up with a big portfolio of property. It works a bit like an annuity. That’s why they are very popular with pensions and insurance funds.”
The US has the largest Reit market in the world, with more than 200 such investment trusts that have a market capitalisation of more than US$670 billion, but you can find Reits in most developed markets, from Australia to Spain and in many emerging markets such as Mexico and South Africa.
There are still pockets of the globe, mostly in frontier markets, where Reits have not been well established but it’s probably only a matter of time before they appear. Soon, there will even be a publicly traded fund in the UAE, Emirates Reit, that will offer investors a slice of buildings such as the Index Tower in Dubai.
“Emirates Reit offers investors a way of gaining exposure to a range of property classes in what we believe to be an attractive market with stable returns from solid income-producing assets,” says Abdulla Al Hamli, the chairman of the Reit Manager.
Reits are often considered a halfway house between stocks and bonds in terms of risk and return because they offer stable returns on a physical asset with more upside than most bonds.
Many investment gurus, such as David Swensen, the manager of Yale University’s $20.8bn endowment, recommend that investors have a Reit allocation in their securities portfolio of 15 to 20 per cent. These investment vehicles have also attracted interest from hedge fund managers, who tend to take big bets on assets, including George Soros and John Paulson. This year, both took a €92 million (Dh466m) stake in a new Spanish property investment vehicle called Hispania.
The greatest benefit of Reits over residential real estate is that getting your money in and out can be done at a click of a button.
Buying a Reit also dispenses the need to manage your own property, with its attendant woes such as phone calls about faulty plumbing.
According to Whiting, you will be paying management fees but often the yield, which can range between 3 and 15 per cent, can be attractive enough to make you overlook the costs.
According to Nariet, a Reit trade association group in the US, Reits outperformed the leading stock market indexes in the past 30 years.
Look at the history of this investment vehicle and Reits first popped up in the US in the 1960s with the very aim of allowing small investors to get access to the kind of commercial real estate – normally only available to large institutional investors – that was exempt from corporate tax in return for distributing at least 90 per cent of its profit.
A decade later they emerged in Australia and in the early 2000s they started establishing in Asia. Emirates Reit, a Sharia-compliant fund established in 2010, is set to list on the stock exchange this week. It owns 10 properties in Dubai including the Index tower and Gems Academy.
Although Reits are mainly composed of commercial real estate, Whiting says this should not deter investors. Such properties typically provide a steadier income stream because businesses often commit to longer rental periods than individuals, he adds.
For those that prefer to take the traditional approach to property investment, buying a physical second home, Whiting warns you may find yourself with gaps in rental yields if your tenant suddenly moves out. Furthermore, he says buying Reits takes the emotion out of purchases because the managers of these trusts take only yield into consideration.
Still, there are benefits of owning a physical home over paper ownership such as the ability to make your own bet about what might be hot five to 10 years down the line. Many investors have made huge gains in London, for example, by targeting parts of the city that were previously unloved.
“I see Reits as a bigger slow-moving animal, whereas a single property has the potential to jump ahead,” says Andrew Covill, the UAE-based director of Henry Wiltshire, an estate agent.
“It’s the hare and the tortoise. You can refurbish a home and the area may go through a big upside through regeneration and suddenly it can be worth a lot more with improved rental yields also.
“Or you can buy into a Reit, where you are a smaller part of a bigger machine – something that’s spread wide and will go up slowly in time and is more commercially based. Reits are a longer term bet with steady returns but with a single property you have the potential of a big capital gain.”
q & a Diversify and prosper
How can I invest in Reits?
All you need is a brokerage account. If you don’t have one, the most cost-effective, no-frills solution is a discount brokerage that gives you cheap commission although no advice on what to buy. The popular discount brokerages that give you the most access to global securities markets include Interactive Brokers, Charles Schwab and Vanguard.
Which Reits should I buy?
It all depends on how much risk you are willing to take, and whether you would rather buy a basket of Reits through an exchange traded fund and closed end funds, two derivative products that can be bought and sold like a stock or buying individual Reits. Buying a Reit ETF will give you a broad exposure to a particular geography as will a closed-end fund. The latter often trades at a premium or a discount to the underlying assets and if you search closed-end funds carefully you can often find bargains. The higher the interest rate of a country, the bigger the yield will be on the Reit.
Is there a low-cost fund that can give me broad exposure to Reits?
If you want a one-stop shop that gives you access to a basket of global Reits, you would do well to consider the SPDR Dow Jones Wilshire International ETF. It yields 4.9 per cent and is the biggest by market capitalisation in its class. That compares to the SPDR Dow Jones Reit ETF, which just tracks US Reits and has a yield of 3.2 per cent. For the more bold of heart, you could have a look at the IShares Mortgage Real Estate Reit ETF, which yields 14 per cent. US mortgage Reits have been pummelled in recent years over concerns of rising interest rates. So the thinking goes that these Reits, which buy mortgages from banks using borrowed money, are at greater risk of default if the primary owners of the debt can’t keep up with the payments.
What are the main risks of holding Reits?
Reits share many of the same risks as holding any other real estate and are subject to the forces of supply and demand, although other risks specific to Reits include interest rate fluctuations. That’s because Reits typically borrow against their holdings at a rate of 50 per cent of its assets to fund additional purchases. So if interest rates rise, the trusts will have to pay higher interest and hence the dividends would typically decline.
mkassem@thenational.ae
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