Going Global With REITs
Investing in real estate doesn't just mean buying up beachfront property or empty office buildings. Besides reducing corporate taxes, real-estate investment trusts, or REITs, are more flexible and easily traded than putting cash down on a piece of land. REIT funds, which buy the stocks of real-estate investment trusts, pool the risks of property buying without tying up money in the long term.
Now more countries are entering the REIT market, giving investors a chance to take advantage of booming property markets around the world. Driven largely by REITs, the market capitalizations of global real-estate securities grew from $368 billion in 2002 to $1.2 trillion last year, according to investment firm Cohen & Steers. The United States is still about a third of that market, but Europe and Asia are quickly catching up. Last year, 27 new REITs were started in Asia, according to real-estate services firm CB Richard Ellis. Associate Editor Renuka Rayasam spoke with Jim Corl, executive vice president and chief investment officer for real-estate securities at Cohen & Steers, about the global growth of REITs.
Why invest in REITs?
Historically, real-estate investments have been held in highly leveraged and therefore tax-sheltered partnerships. The reason why REITs have been proliferating around the world is that they offer that type of tax structure to the marketplace. They pay out profits every quarter in dividends to shareholders; then those are taxed at an individual level. The government gets to tax rental revenue streams that under private structures had not been taxed.
So governments get the extra tax, but what about investors?
The reason investors like them is that they provide a stable cash flow that is characteristic of owning income-producing property. Profits flow through directly to investors in the form of very high sustainable and growable dividend payments, which makes the stock less volatile. That dividend provides a guide as to what is happening to the underlying portfolio. You can't fake the dividend.
How are REITs better for investors than buying property?
Essentially a REIT emulates the tax-advantaged attributes of a partnership with the best attributes of a corporation by providing investors limited liability. If you invest $100, you're never going to lose more than $100. If the partnership goes out and buys a piece of land and gets sued, you can lose $500.
But isn't this a bad time to invest in real estate?
Right now real-estate securities around the world are down 20 percent since February. That's a nasty pullback by anyone's standard. The result of that is you have got an average real-estate company trading at a significant discount to the value of its underlying real estate. Whenever people have fear that interest is going to rise, they sell REITs, but that is the last thing they should do. If you look at REIT dividend yields, they have increased the same or more than inflation in the past 20 years. So REITs are a great inflation hedge because income goes up every year.
Why are REITs growing in popularity globally?
The REIT structure has been proliferating around the world since 2000 when REITs got put into the S&P 500, which said, "This is an important asset class." They are going to get in Germany this year, going to get in Italy very soon. The reason the real-estate security market is doing well is that there is a global restructuring of real-estate ownership out of banks into specialized real-estate companies that are professional property managers. In Germany, most of the apartments are owned by local governments or large industrial corporations that had nowhere to house workers after World War II. So housing stock in Germany is very old and owned by paternalistic entities. That is in the process of changing. They introduced a REIT vehicle that makes it more tax efficient for these companies to go around and buy up apartments.
What about Asia?
In Hong Kong, we recently had the largest REIT [initial public offering] ever in the world. The government wanted to get out of the business of owning and operating shopping structures. It sold for $10 a share but was worth about $16 a share. With governments, getting the best price is not the top priority, which makes it a huge investment opportunity. They dumped those very valuable assets on the public market. That's one reason why real-estate securities have been doing well.
What can we expect going forward?
There is now a global economic recovery. When an economy does well, real estate does well. Rents and occupancy rise, and the real estate is worth more. Regulatory change is really putting in place these REIT-like structures, which is a much more tax-efficient way to own real-estate investments in the first place. Now is the best opportunity to invest in REITs, but the sentiment is negative. That makes this the best entry point for real-estate stocks in the past three years. They are cheap, and literally every market is trading at a discount.
How can investors get started?
Markets we think are most cheap are the U.K., Hong Kong, and the U.S. Because this is a very esoteric part of the market, I would definitely recommend a fund. This stuff is squarely in the "don't try this at home" category. If you want to own a portfolio, a great way to do that is through a fund.