Real Estate Investment Trusts (REITs) were originally introduced to the market in the US in 1960 and have been around ever since, gradually making their way to destinations further afield. Basically, a REIT can be described as a company that manages a portfolio of real estate to earn a profit for its shareholders.
REITs benefit from escaping corporation tax
and in return must pay out 90 per cent of their property income to their shareholders.
By buying into a REIT, individuals who wish to invest in property can do so without physically having bought any bricks and mortar - it is down to the investment trust to purchase the property, which it then leases.
What is the Return on Investment?
Housing has long been considered to be an attractive market for investment and the opportunity to earn property-related returns without the hassle and initial cost of becoming a hands-on landlord makes REITs an effective real estate investment vehicle
. The trusts look to offer similar returns that would be seen if investors owned the property directly.
REITs generally offer a reliable source of income - with companies required to pay 90 per cent of the rent collected to shareholders - which can make them sound investments.
Pros and Cons
REITs give the average investor
the opportunity to enter into and learn about the commercial real estate market without any of the day-to-day complications of being a landlord. A separate body will arrange marketing, rent, client management and maintenance.
Perhaps the main risk lies in hedging your bets on the property market. If your main investment is your own home and you only have limited investments in the stock market, for example, you would be particularly at risk from any problems in the property market. Your home could lose value and so could your shares in the REIT.
REIT share prices tend to be less volatile than equity stocks on the whole. This is because rental income and management expenses are predictable in both long and short timeframes.
Furthermore, analysts are able to predict the performance of REITs more easily than more volatile stocks and other investment classes, making them a useful portfolio diversification.
- Wednesday 26 May 2010