DEFINITION REIT REIT is tax designation for a corporate entity investing in real estate. purpose of this designation is to reduce or eliminate corporate income taxes. In return, REITs are required to distribute 90% of their taxable income into the hands of investor. structure was designed to provide a real estate investment structure similar to the investment structure mutual funds provide in stocks.
can be classified as equity, mortgage, or hybrid REITs originated in the 1880s at a time when investors could avoid "double tax," or a tax at corporate and individual level. In the 1930s, this tax benefit was removed, causing investors to pay "double tax. is a trust fund that holds invests in RENTAL properties. major incomes is rental income. it is required to distribute most of its profit as dividend to its holders. first REIT, Axis-REIT, was listed on Bursa Malaysia (KLSE) in August 2005.
CHARACTERISTIC OF REIT Physical control by owner unlike stocks and bonds, which allows the owner to intervene and change the property for better positioning Durability –No fixed maturity like bonds - Allows owner to develop and implement a dynamic real estate investment strategy High heterogeneity and price differentiation Limited market price information and costly and time consuming market price discovery process- assessment of market price requires valuation of each property on a case-by-case basis High management requirements including leasing, rent collections, building maintenance, marketing etc.
Inefficient market with high information asymmetries providing opportunities for higher returns to those that have special information, resources, access to capital and expertise in pursuing certain opportunities. High transaction costs due to fees and commissions payable upon closing of the transaction. High capital requirements giving advantage to market participants with greater and faster access to capital.
Low liquidity as the sale of a property is a very time consuming process due to the high capital requirements, high product heterogeneity and high transaction costs. High Quality Segmentation across property types and sub-qualities within property types, requiring thorough market analysis for the particular quality segment represented by the real estate investment opportunity under consideration. High Location Segmentation across cities and sub-markets within each city, requiring thorough market analysis for the particular location within which the real estate investment opportunity under consideration is located.
PROS IN REAL ESTATE INVESTMENT TRUST1) Liquidity REIT is a liquid investment when it is listed as a shares or units of a listed REIT and traded like any others stock on the stock exchange. REIT able provides greater investment flexibility, with ability to react more quickly to change in market conditions, in comparison to investing in physical property.2) Income Stability and High Dividend Distribution. REIT earning are underpinned by legally enforceable lease agreement. Quality leases should underwrite their income (dividend) from the collected rents of the assets with ‘blue chip’ tenants causing these distribution to reliable and comparable to other interest bearing investments. REIT industry’s dividend yield generally produce a steady stream of income through all market condition, which significantly higher than other uquities on average.
3) Capital Stability and Growth Listed REIT is traded in stock exchange. Therefore, it gives investor returns though capital appreciation from price changes besides high pay dividend. However, REIT stocks are not ‘trading vehicles’ indeed they are ultimate ‘buy and hold’ investment.4) Tax pass-though REITs are attractive investment because they benefit from a special tax structure. REITs typically do not pay corporate tax although distribution are taxed at the unit holder level as mention above.
5) Quality of Real Estate Assets. REITs allows investor to hold portfolio of highly illiquidity real estate assets. In addition, it provides retail investor with an opportunity to invest in high quality assets of a value that would otherwise be beyond normal prudent investment criteria.6) Diversification. REITs also offer the benefit of diversification arising from their holding of a portfolio of properties with different lease length, geographical location and tenant types, rather than a single building. REITs also offer a significant source of portfolio diversification for investor.
7) Expert management. REITs able to provide the expertise of selection and management of real estate. properties in a REIT are maintained and operated by professional property managers which they have the expertise beyond the knowledge of individual investor.8) It goes up. While other investments tend to fluctuate, real estate, especially in desirable areas, usually becomes more and more valuable.
9) Your monthly payment is fixed. Aside from taxes, which fluctuate every year, your monthly payment will usually be fixed. This means no landlords raising rent and no trying to calculate your changing home budget. In addition, your mortgage company will make all this painfully easy for you to pay on time, and most mortgage companies have convenient ways to pay online.
CONS IN REAL ESTATE INVESTMENT TRUST1) Economic Recession Recession is a downturn in a nations economic activity. The consequences typically include increased unemployment, decreased consumer and business spending, and declining stock prices.2) Competition of Tenants The same type properties located in the area of REIT’s properties may compete with REITs properties for tenants. The aggressive competition may affect REIT’s occupancy rate. So,rents need to be lowered and additional capital improvements must be adjusted to improve the competitiveness of REIT’s properties.
3) Tenancy Renewal and Rental Increment The ability to valve rental rates and revenue is probably a REIT’s most important determinant of internal growth. Rental rates can be increased over time if a property in despicable to tenants, and higher occupancy rates can lead to even higher rental revenues.4) Financial Condition of Tenants Gross rental income of a REIT may affect by the insolvency or downturn in the business of tenants due to the supply and demand factor that discussed above. Tenants seeking for protection under the bankruptcy laws could in delays of rental payment or inability to pay rental at all or termination of leases prior to expiry.
5) Increase in operating and other expenses Increasing of operating and other expenses without corresponding increase in revenues could adversely affect REIT’s ability to make distribution to unit holders.6) Ownership of REIT’s Properties Some of a REIT does not entirely own its underlying properties. This practice is a weakness for a REIT’s operation. The reputation and condition of the properties is under management of all owners. If the other owner do not maintain the properties in a proper manner, it would be affected the occupancy rate.
7) Unsecure Dividends The net operating profit that REIT earns from its real estate investment depends on the amount of rental income received, the level of property, operating and other expenses incurred.8) Slow Growth There are slow growing in REIT. Income is needed to overcome the higher dividends. Less amount of income (normally 10%) will be put back into REIT while the rest must be paid out higher dividends. That means there is a lot less going back into the business to make it grow. So, it will affect the slow growth of the income because of the lower modal.