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REIT Articles
Shedding some light on REITs
Business World
The Financial Executive Column
Billy Cortez
March 20, 2007
This is something good for a change. As you cut through all the noise and confusion in the world’s equity markets, you’ll be surprised to learn that the best story that has emerged out of the US stockmarket in 2006 is that its real estate mutual funds or REITs have remained mostly unaffected even when the US housing market started showing signs of slow growth. Investors continue to buy REITs because of their steady dividend payments as well as their benefit as a way to diversify the overall investment portfolio of both institutional and individual investors.
REITs ( rhymes with treat) or also known as real estate investment trusts are one form of indirect participation in real estate investing. It’s a security, a capital market instrument that sells like a stock in the stock exchanges. Like mutual funds, REITs sell shares to the public to raise capital. But unlike mutual funds, REITs only invest in real estate and mortgages. REITs can be publicly or privately held. Public REITs are listed in the stock market like common stocks.
REITs come in three forms, namely, Equity REITs, Mortgage REITs, and Hybrid REITs. Equity REITs own and operate income-producing real estate. Mortgage REITs lend money directly to real estate owners and their operators, or indirectly through acquisition of loans or mortgage-backed securities. Philippine banks with many real estate mortgages in their books could very well use REIT vehicle, assuming this will be legislated into law, for their capital raising activities. Hybrid REITs, on the other hand, are companies that own properties and make long-term loans to large real estate buyers as well as intermediate and short-term construction loans to builders and developers.
The main attraction of REITs is that they are able to pass on all the tax advantages of real estate ownership to their investors. Most laws on other countries governing REITs specifically mandate that a REIT must distribute 95% of its taxable income to shareholders each year. Given that REITs pay out almost all of their taxable income to shareholders, those who invest in REITs look to it for significant dividend yields. In fact, investors can build greater long-term wealth by combining homeownership and REIT stocks as part of their diversified portfolio.
The US Congress created REITs in 1960, suffice it to say, to give anyone and everyone the ability to invest in large-scale commercial properties. Since then, REIT as an industry and as a mainstream investment has grown dramatically in size and importance. In 2001, Standard & Poor even added REITs to its major indexes including the S&P 500. Now, they exist in several countries like the US, France, Japan, Australia, Canada, Bulgaria, and are now being introduced in UK and the Middle East, and in Germany probably next year.
But there is more to investing in REITs than merely picking one off the shelf. As an investor, you still have to evaluate the merit of every REIT, its capital structure, investment objectives, and management. If REITs carry that potential for high return, they also carry that potential for high risk.
In our country, the active proponents of REITs are, among others, FINEX colleagues like PSE Pres. Francis Ed. Lim and SGV partner Dominador “ Butch” Gregorio III, chairman of FINEX corporate finance committee. Like other REITs supporters in the financial, banking, and real estate industries, they think REITs will make the Philippine capital market more robust, dynamic, and market-oriented as soon as the trading of REITs is allowed here, that is, after the same have been completely studied, thoroughly explored, and passionately debated within the halls of Congress.
One of the wonders of the capitalist system is that it has done a great job of helping us measure risk. The greater the potential reward from any investment, the greater the risk involved. Thus, investors make their investment decision based on current yields, tax situation, their (investors) ability to hold to maturity, and their ability to accept principal risk (risk tolerance level). They invest in REITs because they think, based on their study, they are fundamentally sound and their prospects excellent. That way, they need not watch the daily gyrations in the stock market with fear in their throat when it is down, and exultation in their soul when it is up.
Let the debates on REITs begin.
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