#Real Estate — 11.05.2015

Looking to invest in REITs? Here is what you need to know!

Pol Robert Tansens

Our real estate specialist provides key market information to help you stay abreast of global evolutions.

Our market specialists bring you the most up to-date market information monthly on real estate securities* – or, frequently referred to as REITs (Real Estate Investment Trusts). Every month our Head of Real Estate Strategy Pol Tansens shares key information to help investors stay abreast of the many global market evolutions.

Performances were well above expectations in the 12 months to end-April 2015 for most REITs markets, even though REITs have lost somewhat momentum since April. They underperformed compared to the broader equity markets as across the board in all regions during April indeed – this was especially flagrant in the US.

The 4.2% increase that the EPRA/NAREIT Developed Asia Index witnessed in April put it ahead of all other markets. The EPRA/NAREIT North America index, on the other hand, was down 4.5%, reflecting a pause in North America's economic recovery. Continental Europe was not spared either, despite have outperformed in recent months, last month, they experienced a decrease of 2.6%.

Although the high valuation of listed real estate poses a challenge to many property investors today, the good news is that REITs act as a suitable proxy for direct real estate investments in the long run (5+ years). The internal rate of returns (IRRs) on listed property is similar to levered equity returns carried by the underlying property assets when held for a longer period. Over the 10 year period up to the end of April 2015, annualised REIT returns (after leverage) varied from 4.2% for the U.K. to over 10% for Asia excluding Japan). Irrespective of market sentiment and property cycles (source: RESIG Wealth Management), even Continental Europe was capable of offering an attractive 8.5% IRR in the same period – which is well above the annual gross dividend yield booked over the same period. Moreover, listed real estate increases the overall liquidity within a diversified asset portfolio.

Although there is an acknowledged risk of modestly higher nominal interest rates in the near future, this will not necessarily be bad news for property investors provided the following 2 conditions are met: 1) REIT properties are financed at fixed interest rates; and 2) higher nominal interest rates stem from demand inflation reflecting a more healthy economy In the latter case, higher nominal interest rates would magnify the inflation-hedge characteristics of property given the nature of rental properties being indexed (or reviewed upwards) in many countries of the world.

*Real estate securities provide investors a liquid way to access property assets without having to buy property directly. A real estate securities is a share of company or trust, privately held or listed, that manages a portfolio of income-producing properties, such as shopping malls, office buildings, apartments... Distribution of most of their profits as dividends is mandatory for a REIT to receive special tax treatment and thus usually offer investors attractive dividend yields. Investors typically turn to listed real estate because rental income is a major component of returns. Additionally, real estate securities have the added benefit of not only providing long-term performance but also for facilitating portfolio diversification.