REAL ESTATE INVESTMENT TRUST
MARIAM NASIR, Manager Research
Apr 30 - May 13, 2007
With the evolution of many avenues for investment and smarter returns, Real Estate Investment Trust (REIT) made their way in to incarcerate the advantages of booming property prices. REIT, a tax designation for a corporation investing in real estate is an investment product that specializes in owning, operating, leasing, or financing real estate. This is a product which provides a similar structure for investment as mutual funds provide for investment in stocks.
EVOLUTION OF REIT
REITs evolved in the year 1960 and ever since then the industry has grown dramatically in size during the last decade in particular. Internationally REIT industry has grown at an astounding rate. One REIT alone surpasses US$10 billion today. In order to maintain strong earnings growth, REITs are acquiring or merging with other REITs, acquiring more properties and developing properties. Factors sparking increased investor interest include.
*REITs — also known as real estate stocks — have outperformed most other major market benchmarks over three decades with significantly less volatility.
*REITs operate commercial properties in nearly every major metropolitan area across the country and in several international locations.
*In 2001, Standard & Poor's recognized the evolution and growth of the REIT industry as a mainstream investment by adding REITs to its major indexes, including the S&P 500.
INVESTMENT AVENUES OF REITS
REITs invest in all property types. With a very diverse profile, the REIT industry offers investors many alternatives across a broad range of specific real estate property sectors, including:
*Industrial parks and warehouses
*Lodging facilities, including
*Hotels and resorts
*Health care facilities
TYPES OF REITS
*Equity REITs: Own and operate income-producing real estate.
*Mortgage REITs: Lend money directly to real estate owners and their operators, or indirectly through acquisition of loans or mortgage-backed securities.
*Hybrid REITs: Are companies that both own properties and make loans to owners and operators.
RETURNS DELIVERED BY REITS
*REITs Deliver Income & Long-term Growth: The special investment characteristics of income-producing real estate provide REIT investors with competitive long term rates of return that complement the returns from other stocks and bonds.
*High Dividend Yield: REITs are required to distribute at least 90 percent of their taxable income to shareholders annually in the form of dividends, significantly higher than other equities on average.
*Share Price Appreciation: Long-term growth in share prices is tremendous when talking about REITs.
REITS — ROLE IN ECONOMY
The inclusion in 2001 of REITs in the Standard & Poor's 500 Stock Index, the most widely followed investment performance benchmark speaks to the increasingly widespread recognition. REITs, alongside other mainstream industries, are now widely acknowledged for the integral role they play, both in the economy and in diversified investment portfolios. The ongoing success of REITs is a reflection of many things, from the income generating and growth potential of the REIT enterprise, to the proven portfolio diversification benefits of owning REIT shares in balanced investment portfolios and from the benefits of active and professional management of real estate properties, to the transparency and management accountability that are essential components of REIT corporate governance.
REITS IN PAKISTAN
Pakistan is in the process of tapping the REIT market five years after Asian pioneer Japan, which was followed by South Korea, Singapore and Hong Kong. The government wants to take advantage of rising property values in the economy, give developers an opportunity to free up cash and more choice for investors. Draft rules which will regulate the REITs, which pool funds to buy properties and distribute rental income among investors have been approved by the Finance Ministry. The Securities & Exchange Commission of Pakistan has also recommended capping property registration duties at 1 percent of the land value, eliminating stamp duties which differ by province and range from 3 percent to 5 percent. A REIT management company will need a minimum equity of 50 million rupees and will have to distribute 90 percent of its net annual income like mutual funds, according to a copy of the draft rules. Each fund by a REIT manager will need a minimum size of 250 million rupees. Although major ground work has already been done but so far no company has been licensed to operate a REIT. The major factor which is limiting the investor or the companies to come up with REITs is the lack of transparency in real estate prices. Taking a crude average Pakistan's property market prices have grown at an average annual pace of more than 25 percent over the last five to eight years. Record overseas remittances channeled into real estate by workers in the Middle East and the United States because of the 9/11 controversy and deportation of many Pakistan locals. Recently HBFC announced that it is preparing itself to float Pakistan's first Real Estate Bonds (REIT) backed by residential as well as office complexes. The Board has already approved the floatation, and HBFC is in the process of engaging Consultants for the same.
REITs clearly can benefit most investors, whether value-driven or growth-oriented, individual or institutional. They offer the benefits of ongoing current income, with the potential for long-term capital appreciation that historically has met or exceeded inflation. They are equities that derive a large part of their value from tangible, hard assets and the effective management of those assets. Hence early resumption of REITs in Pakistan would be beneficial to everyone.