The Hindu Business Line : Route to REIT

Looking for the perfect instrument? "How about one that promises not to double overnight or make you an instant millionaire, but instead will pay you a consistent 4, 5, or 6 per cent in quarterly dividends and can rise another 4, 5, or 6 per cent annually as surely and steadily as if they were, say, rental payments? How about real estate?" asks Ralph L. Block in Investing in REITs, third edition from Bloomberg (www.bloomberg.com/books).

REITs, pronounced `reets,' are real estate investment trusts, explains Block. "REITs have been around for more than forty years, but it's only been in the past dozen years that most people have really started buying into these higher-yielding investments." We may not have REITs around, closer home; yet, it is useful to know more about the avenue.

"Direct investment in real estate, whether it be a golf course in California or a skyscraper in Manhattan, is not liquid," says Block. Not so with REITs; investment in these enjoy `the benefit of a common stock's liquidity.' REITs allow individual investors "a way to buy skyscrapers and shopping malls and hotels and apartment buildings... just about any kind of commercial real property."

On the one side, REITs enjoy `access to capital' to `acquire and build additional properties as part of their ongoing real estate business.' And on the other, they offer investors `the steady and predictable cash flow that real estate leases provide.'

Equity and mortgage

There are two types of REITs, equity and mortgage. The former, as its principal business, `buys, manages, renovates, maintains, and occasionally sells real properties. And the latter `makes and holds loans and other bond-like obligations that are secured by real estate collateral.'

With REITs, your portfolio becomes diversified, says the author. Reason: `They don't correlate well with the rest of the market.' Why so? Because REIT stocks do not get efficiently priced, postulates Block. "REITs may often be considered value investments, insufficiently appreciated by the investment public." For starters, value investment is what is `priced cheaply relative to its true value'. Another interesting aspect about REITs that analysts who follow these are able to `accurately forecast quarterly results.' Reason? "Because of the stability and predictability of REITs' annual revenues, occupancy rates, and real estate operating costs."

Those owning a house or a flat may say that they don't need REIT investments, since they already have real estate. "The dynamics of home price movements are very different from those of commercial real estate," distinguishes the author. For one, there is no diversification if the only real estate investment is your own home. And secondly, "Capturing the appreciated value in a single-family residence requires its sale, and most individuals would be reluctant to sell their beloved home and move into an apartment building."

Of vital read is a chapter titled `what can go wrong', on issues that affect all REITs. Block speaks of two principal potential hazards: `An excess supply of available rental space and rising interest rates.' There can be a temporary decline in demand for space when the economy is recessionary; but "the excess supply that is brought on by overbuilding will sometimes be a larger and longer-lasting problem," cautions the author. In the final chapter, Block reads the tea leaves to see where REITs are headed to.

A book worth investing in, with the hope that REITs would soon become popular here too.

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