Real Estate Investment Trusts(REITs) - Information from the Pulses, August issue

While writing this article, I am also learning about the REITs which I would like to share with all of you.

REITs started in 2002 and went all the way up to 2007 when they saw the reversal during the crisis.

Whats makes REITs attractive?
1. Transparency
As compared to other stocks, it has less uncertainty and less ambiguity. For examply, when we talk about a manufacturing company, a lot of factors can affect the share price.. This includes the level of competition, sustainability of demand of the services and products.. NAV of the company may not be the same as the book value due to the real machine liquidation value. As technology improves, the prevailing machine may no longer be able to produce the new product. Obsoleted machines has less value.
2. Lack of real information
Do we really know what really goes inside the company? Is the picture really as rosy as what is printed in the reports?

REIT- a simple model
RAISE CAPITAL -> Buy and manage revenue generation property

BENEFITS:
Transparency
1. Cost of Caipital is known
2. Revenues generated from property is known as rental are locked for three years.
3. A trip to the mall will give you an idea of how the mall is performing
4. The management fees is fixed.

Real Estate Vs REITs/STOCKS
No doubt it is true that real estate offers high returns for little outlay when the market is hot. There is also a steady rent income unlike REITs and stocks where the dividend is paid semi anually or anually.

However, to invest in property, one has to come up with a large sum of capital outlay and it is less liquid taking some time to sell as compared to the stocks and REITs which is traded in the open market daily. Stocks and REITs are also more affordable as they are sold in smaller lots and hence, more affordable. Property transaction usually takes a longer time to complete... say about 2-3 months while stocks and REITs is about four days.

There are hefty transaction costs involve in buying a property like the agent commision, stamp duties, legal and administration fees, unlike brokerage which is only 0.275%.

Property is taxed but property stocks and REITs are not taxed.

You can diversify your portfolio if you own shares of bigger developers like Capitaland as they hold properties across the residential, commercial, retail and hospitality sectors...