Is the worst over for real estate investment trust (REIT)?

A Real Estate Investment Trust or REIT is a corporation investing in real estate that reduces or eliminates corporate income taxes. Each year, a REIT is required to distribute 90 percent of its profit, or more, to the shareholders. By doing so, the trust will not be subject to taxation. Only the individuals who receive shareholder profits will be subject to individual taxation.

Like other corporations, REITs can be publicly or privately held. Public REITs may be listed on public stock exchanges like shares of common stock in other firms. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

Like buying stock, you have no control in the operation or selection of the investment property although some REITs make a public offering of a specific investment property. You, at least, have the opportunity of examining the property in which your investment funds will be placed. But, you still have no control over the management or operation of the property. (Read “Why real estate is a good investment?” to understand the advantages to have control over your investment property.)

The key statistics to look at in a REIT are its NAV (Net asset value), AFFO (Adjusted Funds From Operations) and CAD (Cash Available for Distribution). REITs face challenges from both a slowing economy and the global financial crisis, depressing share values by 40 to 70 per cent in some cases since 2007.

Is the worst over?

The market has discounted REIT shares to levels that anticipate a drawn-out period of deteriorating fundamentals. They are trading at steep discounts to asset values. The single most important factor affecting a recovery will be the course of the economy.

We expect the record fiscal and monetary stimulation being put in place worldwide to at least stem the economy’s decline. We should start seeing evidence of this by the end of 2009, when economic statistics begin to suggest a bottom. REITs tend to be early-cycle stocks, so they could start to perform well sometime between now and then. Meantime, it is hard to imagine valuations getting much worse.

It is likely things will get a bit worse before they get better. When you are going through a recession, sentiment is always bad, and things always seem worst near the bottom. The “it’s never coming back” chorus is getting louder.

On the other hand, there has never been more fiscal and monetary stimulus thrown at the world’s economies. Mortgage rates are down. Mortgage refinancing is up. Spreads are starting to narrow between different grades of securities. But it is going to take time because the economic and financial crisis is just too big.


About The Author


Coming from a humble little town named Tangkak in north Johor state of Malaysia, I am so lucky to have chances to learn and work both in Johor Bahru and Singapore - a conurbation with 6.49 million still fast growing population - since year 1996. Hope now I can have a chance to contribute back to the community by sharing what I see, what I know and what I learn in this wonderful place.

1 Comment

  • jordan woo

    Reply Reply June 25, 2010

    very useful info.which touches on every aspect of real estate investment. example like ranging from BLR & Fixed Rate.

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