| Real Estate Investment Trust, REITs Real estate investment trust are special purpose vehicle created to hold a specific class of asset, normally property. It is sometimes created to hold properties of large corporations so that funds can be release for business ventures. The properties are sold to the special purpose vehicle under the management of a trust and units in the trust are sold to the public in the open market; it is available in most stock exchanges. This securitization process will have the effect of taking low yield (5% to 8%) assets such as properties out of the balance sheet, thus improving cash flow and the funds utilised on higher yield business ventures for the corporation. The overall effect is to increase shareholders value as earnings per share increases whereas subscribers to the REITs will earn constant dividends yearly. It is a win- win situation for all. REITs are govern by a trust with strict rules regarding distribution of income, gearing ratio, management fees, etc on behalf of unit holders. The value of each unit in the trust is determined by its holding of properties and the yields & returns generated. Normally most REITs will pay a five percent return after management and administrative fees. Since most commercial properties gives a 7 to 8 % yield, to achieve such a payouts base on its holdings, a high equity to debt ratios have to be maintained in order that interest charges are capped low. With low borrowings and minimum leverage the investment is secure and stable. Stock market indicators such as PE ratio and earnings per share do not apply. There are two types in general, direct investment in properties or mortgages. Equity REITs invest in properties and derives income from rents. Mortgage REITs invest in the ownership of property mortgages. They may loans money for mortgage to owners of real estate or purchase existing mortgages or mortgage backed securities from financial institution. Their revenue comes primarily from the interest. There are also hybrids that invest in equity REITs and mortgage REITs. Properties held are residential, commercial and industrial; such as hotels, service apartments, shopping centres, office blocks, purpose built and generic factory buildings. REITs involving solely commercial and industrial properties are more volatile compare to residential REITs as its performance is dependent upon the economy and the sentiment prevailing in the market. Market capitalisation of REITs is derive from funds from operations (FFO) or adjusted funds from operation (AFFO) applied against a multiple. It takes into consideration dividends paid and capital appreciation. Due to the time lag in the property market between rental returns and capital values, they are at times undervalued or overvalued; its true value is not always reflected. |
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