REITs as Important Vehicle for Real Estate Investment
By Acceler8now.com Investing Education Team November 5, 2007
One of the important investment questions we have sought to answer elsewhere on our website is the crucial one of how small investors can access the real estate investment market. Because real estate pricing is largely in chunks, it takes significant accumulation of funds to take on even small scale property investment. Well, that's if you haven't considered the small investor options for property investment outlined in other articles. If you would like to refresh on those recommendations or haven't read them before, here's a link to an article "Revealed - 8 Ways a Small Player Can Cream Off Mega Profits From the Property Market". To expand that scope, we now present the REIT option for real estate investment.
What is a REIT
REIT stands for Real Estate Investment Trust, which is a unit trust. Unit Trusts, also called Mutual Funds, are collective investment schemes and are well covered in our section on unit trust investing. Their general structure is that individual investors buy into a fund by taking up its units, thereby contributing a pool of funds, which a professional fund manager manages - investing to earn good returns for the fund investors.
Property Sector Investments
A REIT is however focused on the singular business of investing in the real estate market niche. When you invest in a REIT, you elect to commit the fund to real estate investment since that is the only sector a REIT will invest in. A REIT will possibly invest in residential property acquisition or development, including estates, or commercial and office buildings, shopping complexes, land acquisition, warehouses and other property structures. It may also invest in the stocks of property sector companies. Indeed the requirement is that a REIT in Nigeria must hold at least 75% of its total assets in Real Estate and not more than 10% of total assets in liquid assets like TBills, cash and bank balances. It must also distribute at least 80% of its annual income to the fund's unit holders. Such distributions could be on quarterly or half-yearly basis.
Benefits of Investing in a REIT
REITs offer the same benefits as other unit trusts, with the additional opportunity they provide to even small investors to have an investment stake in the usually profitable property market. An investor that cannot easily think of owning a property investment because of fund limitations, can very well buy some units of a REIT and, by that, channel his tiny investment to real estate sector opportunities. Because property investment is a specialised field that needs some expertise, the small investor also enjoys the additional benefit of the professional management of his investment since a REIT will invariably be run by a fund manager and staff that have housing sector experience and training. That way, the potential yield on the investment is likely to be much higher.
REITs also help investors achieve better portfolio diversification. Because the property market is not exactly affected by the same factors as the stock market, your investment in a REIT could help cushion a period of bad stock market performance as the property market may, in contrast, be doing well.
How to Invest
REITs can be open-ended or close-ended. When open-ended, such funds have no closing subscription date, meaning that subscription is an ongoing process. In effect, an investor can join the particular fund any day he chooses to invest, simply by applying to the fund manager and providing payment for the units he wants. He gets issued certificate or other evidence of subscription for the units ordered. When a fund is close-ended, it means the offer is of a bullet nature, a one-shot affair. Once the units are sold during the offer period, that puts paid to investment in the primary offer. Units can no longer be bought from the fund manager. If such fund is not traded on the stock exchange, it means new members cannot join. If, however, it is listed and traded, secondary market purchases will then be the only window for new investors to join after the closure of the offer.
REIT Investment Opportunities in the Nigerian Market
The Nigerian capital market, you must appreciate, is still in its infancy. One evidence of this is the limited variety of investment opportunities. The Unit Trusts/Mutual funds sector, for instance, only boasts very few opportunities. Unlike very developed economies that parade hordes of these funds, our market has probably less that 20 funds. REITs are even a rarer class, but one such fund is the Skye Shelter Fund, a close-ended fund. If you are interested in using this vehicle to pursue real estate investment, the answer is to look out for fund public offers and take the opportunity when they come up. Alternatively, you can check for currently traded funds on the Nigerian Stock Exchange to buy from the secondary market.
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