Real Estate
Content
Real Estate Real estate can be land, building, or any other structure. It is one of the most widely used alternative investment strategy as it offers various benefits to investors like: 1) Reduction of Risk – Real estate and stocks have a very low degree of corelation with each other and hence real estate is useful for reducing the risk of investors. 2) Higher Returns – Real estate provides returns above risk free rate and also delivers steady cash flow to investors. 3) Hedge against Inflation – Usually real estate gives return which higher than that of Inflation and hence helps investor to hedge himself against inflation Real Estate Investment Fund One of the most widely preferred means for investing in real estate is REIT. REIT is defined as security which allows investors to invest directly in real estate either in form of properties or mortgages. REIT is highly liquid as it is traded in major stock exchanges of the world. It offers high yield to investors and also have special Tax Benefits. It is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or country. Investing in REITs is a liquid, dividend-paying means of participating in the real estate market. Types REIT Real estate investment trusts (REITs) are a key consideration when constructing any equity or fixed-income portfolio. They provide greater diversification, potentially higher total returns and/or lower overall risk. In short, their ability to generate dividend income along with capital appreciation make them an excellent counterbalance to stocks, bonds and cash. REITs generally own and/or manage income-producing commercial real estate, whether it's the properties themselves or the mortgages on those properties. You can invest in the companies individually or through an exchange-traded fund or mutual fund. There are many types of REITs available. Here we look at a few of the main ones . Equity REIT's
In this kind of REIT's, the corporation buys, develops and manages real state properties and it doesn't own real state loans. Their revenue comes from the rents of their properties and it composes almost a 96% of all the available REITs. Mortgage REIT's A mortgage REIT is made by those corporations who buys and manages real state loans. It doesn't own real state properties and their source of revenue comes from the interest of their mortgage loans. Although it's not common, these types of corporations may originate their own loans. Hybrid REIT's They are a mix between equity REIT's and mortgage REIT's. In other words, it owns and manages real state loans and properties. Besides these types, REIT's may specialize by geographical factors or industry sectors, or a mixture of both. The top three real state sectors in which REIT's are focused are offices or industrial property, residences and retail stores Characteristics: 1) It is mandatory for REIT to pay at least 90% of taxable income as dividends to investors. 2) At least 75% of total investment must be in Real Estate. 3) At least 75% of total gross income must be earned from rent or mortgage interest. 4) Shares of REIT are fully transferable. 5) Not less than 5 members should hold more than 50% of shares. 6) Minimum no. of share holders should be 100. Investment Strategies: Following are the various strategies used by the investors which invest in REIT Core Strategy: A core strategy is one which derives its income mainly from regular cash flow rather than from capital appreciation. It is a low risk profile. Here fund managers adopt buy and hold strategy which means fund managers buy property on long term basis. This strategy makes investment into properties like office, retail, industrial and residential. This strategy is suitable for investors which have lower risk appetite and want steady income. Core plus Strategy: This strategy requires acquiring a property and than making capital expenditure in acquired property in order to turn them into core property. Capital Expenditure is mainly done for enhancement of acquired property. Once acquired property is
converted into core property, it can be used for normal business purpose which will lead to steady flow of income. Value Added Style: This strategy involves buying a property, making necessary capital expenditures on property (in order to enhance and improve the quality of property) and than selling this property when good opportunity arises. This strategy mainly makes investment into newly constructed buildings, shopping malls, restoration etc. It mainly defers from core strategy in the way that here fund managers don’t hold properties for a very long period. Holding period here is between 3-7 years. Here fund managers sell the property as soon as good opportunity arises in order to earn profit. It has higher risk as compared to core strategy. During the initial years there mite not be any cash flow for investors, hence this strategy is suitable for investors having higher risk appetite and don’t want steady cash flow during initial years of investments.
Opportunistic Style: This strategy is mainly for institutional investors who wants higher returns and are ready to take higher risk. This strategy can be only used as the time when real estate market collapse due to sudden slow down of entire economy. In this strategy, Institutional investors buy property at cheaper rate when there is collapse in real estate market and sell them when market conditions improve and thereby earn profits.
In this kind of REIT's, the corporation buys, develops and manages real state properties and it doesn't own real state loans. Their revenue comes from the rents of their properties and it composes almost a 96% of all the available REITs. Mortgage REIT's A mortgage REIT is made by those corporations who buys and manages real state loans. It doesn't own real state properties and their source of revenue comes from the interest of their mortgage loans. Although it's not common, these types of corporations may originate their own loans. Hybrid REIT's They are a mix between equity REIT's and mortgage REIT's. In other words, it owns and manages real state loans and properties. Besides these types, REIT's may specialize by geographical factors or industry sectors, or a mixture of both. The top three real state sectors in which REIT's are focused are offices or industrial property, residences and retail stores Characteristics: 1) It is mandatory for REIT to pay at least 90% of taxable income as dividends to investors. 2) At least 75% of total investment must be in Real Estate. 3) At least 75% of total gross income must be earned from rent or mortgage interest. 4) Shares of REIT are fully transferable. 5) Not less than 5 members should hold more than 50% of shares. 6) Minimum no. of share holders should be 100. Investment Strategies: Following are the various strategies used by the investors which invest in REIT Core Strategy: A core strategy is one which derives its income mainly from regular cash flow rather than from capital appreciation. It is a low risk profile. Here fund managers adopt buy and hold strategy which means fund managers buy property on long term basis. This strategy makes investment into properties like office, retail, industrial and residential. This strategy is suitable for investors which have lower risk appetite and want steady income. Core plus Strategy: This strategy requires acquiring a property and than making capital expenditure in acquired property in order to turn them into core property. Capital Expenditure is mainly done for enhancement of acquired property. Once acquired property is
converted into core property, it can be used for normal business purpose which will lead to steady flow of income. Value Added Style: This strategy involves buying a property, making necessary capital expenditures on property (in order to enhance and improve the quality of property) and than selling this property when good opportunity arises. This strategy mainly makes investment into newly constructed buildings, shopping malls, restoration etc. It mainly defers from core strategy in the way that here fund managers don’t hold properties for a very long period. Holding period here is between 3-7 years. Here fund managers sell the property as soon as good opportunity arises in order to earn profit. It has higher risk as compared to core strategy. During the initial years there mite not be any cash flow for investors, hence this strategy is suitable for investors having higher risk appetite and don’t want steady cash flow during initial years of investments.
Opportunistic Style: This strategy is mainly for institutional investors who wants higher returns and are ready to take higher risk. This strategy can be only used as the time when real estate market collapse due to sudden slow down of entire economy. In this strategy, Institutional investors buy property at cheaper rate when there is collapse in real estate market and sell them when market conditions improve and thereby earn profits.
