FEATURE REITs
John Redwood says, “The choice of what to invest in is what makes you the money. It’s the biggest single factor, but it’s not the only factor. Keeping the cost of making the investment and management down is another key objective.”
He goes on to explain, “If you take a $10 million investment returning (say) 6% per year, the diff erence in overall performance between having running costs of 0.5% per year and 0.1% per year amounts, over 10 years,to $600,000.” His partner, Christopher Aldous,
agrees: “No-one can guarantee to outperform. Keeping costs low is the best way to boost long term returns.” So does investing through funds work in the real world? Do they buy well? Do they run the assets well? Does the cost of management eat into your profi ts? Is this why people continue to buy actual properties in their own names?
We thought we would check out the facts.
There are several ways of investing in real estate through funds. They diff er from country to country. For this article, we will look only at Real Estate Investment Trusts – largely because these are the most widely available
US REITs
Every REIT must pass these four tests annually in order to retain its special tax status:
The REIT must distribute at least 90% of its annual taxable income, excluding capital gains, as dividends to its shareholders.
The REIT must have at least 75% of its assets invested in real estate, mortgage loans, shares in other REITs, cash, or government securities.
The REIT must derive at least 75% of its gross income from rents, mortgage interest, or gains from the sale of real property. And at least 95% must come from these sources, together with dividends, interest and gains from securities sales.
The REIT must have at least 100 shareholders and must have less than 50% of the outstanding shares concentrated in the hands of fi ve or fewer shareholders.
Ralph Block The Complete Guide to Investing in REITs (Real Estate Investment Trusts). These are, of course, just the US rules but other countries have adopted similar provisions.
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investment vehicles around the world and because they have been around for the longest. REITs are a special type of company that receives favourable tax treatment in return for complying with some special rules designed to make them good and safe investment vehicles.
REITs were invented in the United States. In 1960, Congress passed the Real Estate Investment Trust Act. The legislation exempted these special-purpose companies from corporate income tax if certain criteria were met. It was hoped that the fi nancial incentive would cause investors to pool their resources to to form companies with signifi cant real estate assets, providing the same opportunities to the average American as were available to the elite. Three years later, the fi rst REIT was formed. This is the 50th anniversary of the formation of the fi rst US REITs – hence, in part, the timing of this article.
REITs have since proved popular. In 2012, there were 166 REITs registered with the Securities and Exchange Commission (SEC) in the United States that trade on one of the major stock exchanges – the majority on the New York
Stock Exchange. These REITs have a combined equity market capitalisation of $579 billion. Additionally, there are REITs registered with the SEC but that are not publicly traded, and REITs that are not registered with the SEC or traded on a stock exchange. The US Internal Revenue Service shows that there are about 1,100 US REITs that have fi led tax returns.
No-one can guarantee to outperform
In the UK, REITs were only introduced in 2007. So far, just 26 have been registered. They have a market capitalisation of £25 billion (around $44 billion).
Over the past few years, REIT regimes have been introduced in some 20 other countries around the world: in Europe, Africa, Asia and the Americas. The future of the European REITs has been put in some doubt as the German regulator has suggested that German REITs should be regulated as investment funds under the European Union’s Alternative Investment Fund Managers’ Directive, due to come into eff ect in July 2013. This would have a severe impact on their ongoing viability, which is another reason for the timing of this article. But have they been fi nancially successful? We will look at the US and Australia, where they have existed for longest.
Good, long term data is hard to come by. There is plenty going back to 2005/6 but little beyond that. The longest records are in the US, where the MSCI Index goes back to 1995. so, for this comparison we are going back to January 1996. “Direct Buy in France” is the French Institute of Statistics (INSEE) index of the values of used apartments and covers the whole of France. “Direct Buy in LA” is the S&P (Case Schiller) index for Los Angeles prices, US REITS Index is the MSCI index, covering most US listed
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