Alternative investments: Real estate investment trusts

When we were wrapping up last week’s article we said: any investment other than stocks/shares, bonds and cash (cash, whether in hand or at bank are defined as alternative investments.

Today, we will examine one of the four alternative investments: Real Estate Investment Trusts (REITS).

I am sure you know some people who have done well by investing directly in the real estate or property market. But, as it is, for most of us, even if we real wanted to benefit financially and economically by investing in real estate, we can not afford, and even if we afford — still it will be difficult to diversify by owning a number of houses, or offices spaces or apartment across multiple geographical locations. In this case, investment in publicly traded real estate investment trust (REITs) makes a lot of sense. What are REITs?

REITs are real estate financing vehicles that is modelled after mutual or unit trust funds, which are arrangements for collective investments with a view to earning profits or capital gain income from real estates as beneficiaries of a trust which is divided into units. REITs are managed by either as trustees or boards who then employs managers who are up to the task, leading to maximum rental income, profits and capital gains. Investors contribute money towards capital of REITs by way of buying units or shares in exchange for the rights to receive dividends or interests or capital gains.

Generally, due to economies of scale and deployment of professionalism, REITs have advantage over direct ownership of properties, especially for low-end investors with interest in the real estate. Through the sell of shares or units of the real estate, REITs provide retail investors with the opportunity to diversify among the real estates classes and in various geographical locations.

Let us assume that, there is a day where, one of our Pension or Social Security Funds or the NHC or Watumishi Housing or Tanzania Building Agency or any other such Institution, decides to change their property development financing model and therefore convert some of their properties into units or shares and then sell these shares publicly to individuals and institutions that have interest on the real estates exposure, and then use these proceeds (funds) obtained by selling shares related to particular properties to build other properties then convert them again into units and sell them to investors, and so on. What will happen? (1) there would be a another layer of efficiently priced source of financing in the real estate space; (2) there would many Tanzanian that will be afforded economic and financial inclusion opportunity not only via financing, but also in ownership in the sector; and (3) there would be another front for our nascent capital markets growth as to provides the platform for long term project financing.

REITs holders (investors) are then entitled to dividends from rental income in the underlying property as well as capital gain income as values of the properties appreciate or when the property is being put into the market.

What does it mean? REITs own, and in most cases, operate income-producing properties. The REITs structure is created to provide all type of investors (low to medium end private individuals as well as institutions) the opportunity to invest in large scale, diversified portfolios of income producing real estate in the same way they typically invest in other asset classes. REITs may own many types of commercial real estate ranging from industrial parks, to office and apartment buildings to warehouses, hospitals, shopping centres, hotels, etc.

REITs, basically provide a practical way in which retail/individual investors with interest in real estate sector to invest in large scale, income producing, professionally managed companies that owns commercial and cases residential real estates projects.

REITs are mostly publicly held and listed in the stock market. As of end of 2017, there were more than 500 real estate companies from over 40 stock exchanges representing a market capitalization of more than US$ 1 trillion.

By the way, the genesis of the REITs can be traced back in 1960 where through a legislative action, “the U.S Congress gave all Americans – not just the affluent few – the opportunity to invest in income–producing real estates in a manner similar to how individual and institutional investors invests in shares and bonds”.

What are the advantages of REITs? (i) Diversification: REITs may invest in many different properties in various geographical locations, bringing investment diversification by property and geography to investor portfolios; (ii) Dividends: REITs are usually required to pay a large percentage of their taxable income as dividends to shareholders who in turn pay income taxes on those dividends; (iii) Liquidity: Publicly traded REITs shares can easily bought and sold; (iv) Performance: Over the past 30 years, publicly traded REITs outperformed the leading stock market indices, including the S&P 500, Dow Jones Industrials, NASDAQ Composite, etc; (v) Transparency: Publicly traded REITs operate under the same rules as other public companies for securities regulatory and financial reporting purposes; and (vi) Growth: Over long holding periods, equity REIT returns have tended to outpace the rate of inflation in particular economies, helping investors hedge the purchasing power of their portfolios. I submit to us that, it is time for our public and private sectors institutions operating in the property space to consider this financing model as a way of economic and financial inclusiveness using this sector too.