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Real estate trusts: Are they right for you?

Discussion in 'Biashara, Uchumi na Ujasiriamali' started by MaxShimba, Aug 10, 2009.

  1. MaxShimba

    MaxShimba JF-Expert Member

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    Real estate trusts: Are they right for you?

    If you once invested at the Nairobi Stock Exchange, chances are that you made excellent returns over a short period of time.


    Sadly though, you stand the risk of exposure to an array of factors characterised by a lack of a diversified portfolio.


    If you have considered diversifying your investment portfolio but didn't know which one to go for, then Real Estate Investment Trusts may be an option to consider. But again, you may ask; are they really right for me?

    Simply put, a REIT is a pool of funds that is invested in real estate.


    Funds are drawn from investors and put under the management of a fund manager who then decides on the kind of real estate investments to go for based on the amount raised by subscribers for the trust. REITs will typically invest in real estate or related assets.


    These can vary from shopping centres to office buildings, hotels and mortgages secured by real estate.


    There are three types of REITs but the most common one is an equity REIT.


    The REIT basically entails having investors' pool funds by way of buying shares of the investment vehicle and getting an income out of it.


    This income is mostly paid on an annual basis.


    The other type, a mortgage REIT basically entails lending money to owners and developers or investing the money in financial instruments secured by mortgage or real estate.


    A hybrid REIT combines both the features of a mortgage REIT and the equity REIT.


    An investor in this category has his portfolio well diversified against the downturns in each category.
     
  2. MaxShimba

    MaxShimba JF-Expert Member

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    In Africa, REITs are also gaining popularity in some nations where financial markets are well developed.


    Key in Africa is South Africa which was the top performer in the world in terms of total return over three year period giving a hefty 34 per cent.


    The number of public REITs in South Africa was seven by the end of 2006.

    However, the market had the lowest leverage among the key markets in the world.


    Kenya’s market is slowly coming of age and REITs were launched at a point when investors felt that the property market had completely sidelined the starters in the investment maze.


    But one can also get into a hybrid REIT where investors put in the funds by subscribing to shares of a REIT firm and getting a regular income on an annual basis.


    It provides an investment option that works for small savers who cannot put up a payment to acquire property or build a house.


    One of the advantages of investing in REITs is the tax advantage enjoyed by the investors. This is so because REIT investing allows for tax rebates on gains.


    You can never go wrong on land. The same applies to property as it can only appreciate in value.


    An investor therefore looking for gains over the long term would benefit from investing in REIT as it offers stability over ones investment.

    One challenge with investing in REIT is that the target groups, mainly those within the age bracket of 25 to 45 are excited about short term gains.


    This is not a common feature with REITs which are illiquid and have an investment time span of more than one year.
     
  3. MaxShimba

    MaxShimba JF-Expert Member

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    REITs are a special form of security that gives the investor the advantage of participating in large-scale commercial real estate projects.

    REITs are dividend-paying units that focus on real estate.

    REITs invest in and, in most cases, actively manage large commercial real estate projects.

    These range from apartments to shopping centres to office complexes and a variety of other commercial projects.

    Many investors looking for high income turn to REITs as an alternative to bonds.

    Some of the advantages of investing in REITs include the fact that one can use them to purchase and manage commercial real estate.

    When you purchase units in a REIT, you become a partial owner of those properties.

    From this perspective, you’re also a partial owner of an operating business that manages properties for profit.

    The investor enjoys the benefits of experienced property management without the headaches.

    A carefully selected management team handles marketing, rent collection, tenant management, and facilities maintenance, providing the investor with expertise beyond their own knowledge base.

    Enormous potential

    Again, the vehicle has an enormous earning potential from investing in real estate.
     
  4. MaxShimba

    MaxShimba JF-Expert Member

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    REITs have historically performed well due to the steady long-term appreciation of commercial real estate.

    Short term fluctuations in inflation and interest rates do not normally impact commercial real estate and REIT unit prices as much as most investments.

    Real estate values tend to rise with inflation because it is in relative limited supply compared to other consumer goods and services.

    Because real estate supply tends to be inelastic, as demand increases prices will rise faster in this sector.

    Diversifying your portfolio is a safe way to secure your profits.

    This way when one of your investments isn’t working out, there are other, stronger investments to carry you until things even out. Investing in real estate is a great way to diversify.

    REITs enjoy lower volatility than equity stocks.

    As rental income is very predictable, analysts can be very accurate in their predictions for the performance of REITs. This reduces volatility.

    They also have a lower correlation to equities than many other asset classes, providing portfolio stability for those with an active asset allocation strategy.

    This means that they do not normally act the same as equity stocks or bonds

    There are certain unique risks related to owning commercial real estate, such as exposure to loss due to fire or other perils, which cannot be entirely insured away.

    Like a stock market investment, putting money into this fund carries the investment risk but the manager seeks to minimize this risk by investing in a diversified portfolio of real estate properties.
     
  5. MaxShimba

    MaxShimba JF-Expert Member

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    This could be in the Core Fund which is designed to seek investments in low-risk, high-quality “stabilized” properties, diversified by property type and location.

    The other could be the Value-added Fund which is set to seek investments in a less efficient and higher-returning segment of the market.

    In these strategies, we seek to add value by implementing changes to physical, operational or financial structures.

    Modest leverage is typically employed in these types of strategies.

    Highly leveraged

    And there is the Opportunistic Fund which is designed to seek investments with high-return and high-risk profiles.

    These investments are highly leveraged and may include ground-up development opportunities.

    So, real estate will always offer profitable opportunities — these benefits prove that it is one of the safest investment vehicles around REITs may just be what your investment portfolio needs.
     
  6. D

    Dkipisi Member

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    Thanks, anybody knows how the REIT at UTT is performing? AM assuming it got
    off the ground.
     
  7. MaxShimba

    MaxShimba JF-Expert Member

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    'Simply put, a REIT is a pool of funds that is invested in real estate.
    Funds are drawn from investors
    '

    Who are these investors?
     
  8. Haki.tupu

    Haki.tupu JF-Expert Member

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    UTT REIT failed before it even started! I wonder if those guys quite knew what they were doing! REITs are very specialied type of investment vehicles which need strict legislation! Tanzania could have private REITs but at least we need a REITs legisaltion. The existing Capital Markets and Securities Act is too general to cater for REITs.
     
  9. Haki.tupu

    Haki.tupu JF-Expert Member

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    It is not that simple! Otherwise REITs would be the same as property trusts, property companies, real estate mutual funds, mortgage backed securities etc.
    REITs have a special tax treatment (tax efficient vehicle)- at a corporate level REITs do not pay tax! So if all real estate investor in Dar, say, decided to organise their real estate investment along REITs line - they wouldn't be paying corporate tax (30%) - only shareholders would pay tax (withholding tax on dividends)! TRA, CMSA and the gvt would be taken by surprise!
     
  10. LazyDog

    LazyDog JF-Expert Member

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    Interesting!
    Can you really NEVER go wrong on land?
     
  11. M

    Mama Joe JF-Expert Member

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    LD, Though still naive, yes I think so, coz it says


    unless you are

    but otherwise

    "


    Am trying to learn more on real estate, coz was raised with my mom doing it traditionally, so would like to follow her footsteps.
     
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