There are several ways to invest in the real estate industry. The correct ratio of profitability, risk and investor’s capital are the main factors of choosing the best option for investing. There are several popular ways to invest in the property: to rent it out (capital investment), or to resell it at a higher cost (speculative investment). There are as well several types of real estate investments. Difference between them depends on the investment object and investor’s goals.
Today investments are distinguished among:
– residential real estate (investor makes a purchase of an apartment or a house in order to rent or resell it at a higher price);
– commercial real estate (investor buys an office, retail or warehouse, which he also rents or resells);
– foreign real estate that is currently gaining popularity (investor can buy real estate abroad to lease or resell it);
– real estate under construction (a very popular type of investment, investors buy an apartment from the developer at the stage of excavation, which can be sold later for a much higher amount).
There are direct and indirect methods of investing. In the first case, this is the acquisition of real estate in accordance with a private contract, in the second case it is the purchase of securities of companies that are specialised in real estate investment.
One more way of investing in the property is managing online investing platforms. The work of them is quite simple: online platforms collect investors for rent, renovation or construction, then investors acquire shares of companies or provide loans, in return receiving a percentage of profit. Regardless of the way, real estate investment is estimated to have a great degree of safety, security and the ability to be controlled.
Market of real estate depends on the priority of a seller or buyer, it is determined by the ratio of demand for real estate with the supply of real estate over a certain period of time. Inflation, economic growth, employment can influence the dynamics of the housing market and situation whether it is buyer’s or seller’s advantage.
Seller’s market is a type of market characterised by a stronger position of sellers in it compared to the position of buyers. In the seller’s market, demand exceeds supply.
When demand exceeds supply, sellers have greater control over set prices and terms. In the seller’s market, the seller sells his assets, goods or services to the buyer who pays the highest price.
In the real estate seller’s market there are more buyers than sellers, and you will usually see a situation where several buyers compete with each other to buy one property, which will lead to higher prices. Since demand is high and supply is low, buyers are forced to comply with the seller’s price and terms if they want to purchase the seller’s asset, product or service.
REIT, or real estate investment trust, is a form of a company organization in which company’s capital is formed through selling shares to investors and making investments in real estate by the following ways:
– acquiring real estate for the purpose of leasing them,
– purchase of mortgage securities or the provision of mortgage loans.
Through collective investment, REITs buy and manage profitable residential and non-residential housing. It can be apartments, shopping centers, office premises, hotels, warehouses. Some REIT trusts finance new construction.
Special legislative norms have been developed for REITs, in the case of which the trusts are exempt from the tax on company profits. Taxes are paid from dividends by shareholders. Different countries have different requirements whether REITs must be public companies.
This form of companies was first approved by the American law in 1960. It allowed individual investors to pool their funds for direct acquisition of real estate. The period of 90s of the XX century became a time of change: low real estate prices allowed REITs to actively expand their activities, and companies entering the public market made them accessible to a wide range of investors. Currently, the possibility of creating REIT exists in almost thirty countries.
There are about six hundred and fifty REIT trusts which trade their shares on stock exchanges all over the world. In general, three types of REIT trusts are distinguished:
REIT equity trusts (91.3% of total number of REIT trusts)
Equity trusts acquire, own and manage profitable real estate. Professionals in real estate investments are managing REIT equity trusts that makes them differ from other real estate companies. Large REIT trusts acquire and construct objects for managing them in the future as part of their own portfolio, and not for reselling the objects upon completion of construction. Main income for REIT shared trusts is rental revenue from a property.
REIT Mortgage Trusts (7.4% of total number of REIT trusts).
Mortgage Trusts specialize in direct lending and mortgage transactions of real estate. Modern REIT mortgage trusts mainly provide mortgage lending for existing facilities. Therefore, profit of REIT mortgage trusts is made up of the percentage received from mortgage lending. Some REIT mortgage trusts also manage their interest and credit risks by securitizing mortgage investments, dynamic hedging and other generally recognized strategies using derivative instruments.
REIT Hybrid trusts (1.3% of the total number of REIT funds).
Hybrid Trust is a combination of Equity and Mortgage Trusts. REIT Hybrid Trust simultaneously owns real estate and provides loans to owners and managers. Their investments are done both in real estate and mortgage lending.
Investors buy shares in REITs, also in mutual real estate funds and in exchange-traded funds. This can be done with the help of a broker, an investment bank or through investment life insurance, the so-called unit-linked products.
Choosing an investment instrument and the company in which the investments will be made mainly depends on the investor’s goals, capital, scale of investment and other factors.
Financial analysts advise investors to allocate 10-20% of their portfolio to REITs, using them as a counterweight to stocks. Moreover, for many fast-growing stocks, dividends are very small or not paid at all, while REIT distributes 90-100% of profit (sometimes even more) to dividends.
However, investors who want to make more money will need a consultant. Such consultants are available, but they should be addressed only to those who are planning serious investments. Neither past profitability nor high ratings can guarantee future income. If investment is small, then it makes sense to simply distribute it among different trusts.
With the help of REITs, a person can not only invest in real estate of different countries, but also change positions or exit the market at any time.
Investment benefits of REITs are:
The owner can not always sell his property in a fast and profitable way, but the shares of most REIT investment trusts are traded on stock exchanges every day.
Since the correlation between REIT real estate trusts and other financial assets is low enough, REIT trust stocks are an excellent tool for diversifying investments.
Protection against inflation
REIT trust shares provide good protection of our funds against inflation, as REIT’s main source of income is rent. Rent, as a rule, is adjusted taking into account the growth of the general price level.
In terms of profitability, REIT trusts take place of intermediate position among shares of large companies and bonds. REIT trusts are attractive to an investor with a relatively high level of income and the possibility of long-term capital growth, unlike bank deposits, when the investor knows the level of income in advance.
For now, there were none of bankruptcy cases of REIT trusts. REIT trusts are more reliable organizations than brokers’ services or investing in shares of large companies that may go bankrupt under particular market conditions. Insurance companies and pension funds are main investors of REITs therefore proving their reliability
The factors contributing to REIT earnings are population growth, improvement of the job market, rates of mortgage, the rise in economic activities, industrial growth. Changes in one of those factors will influence REIT earnings.
It is the main factor which has an impact on REITs’ growth. Because of increasing business growth, REITs are positively affected, for example, good ratings in such REITs as Simon Property Group and Ventas.
Another key factor is the rate of population growth where demographics of the region where the company is operated plays the main role. The bigger the rate of population is, the greater demand in real estate.
Improvement in job market
In case of high job growth and occupancy, there is a rise in the rental field. On the contrary, unemployment and the poor choice of vacancies can cause lower revenue of REITs.
When mortgage rates are high, renting a house flat is more attractive for a customer. That affects the high rental income. And vice versa, when mortgage rates are low, the demand in renting an apartment is at a low level, consequently, there is low rental revenue.
Rising percentage rates has a direct impact on REITs. With rising percentage rates, investors demand higher profit on REITs. It makes the prices of stocks diminish. In addition, that leads to higher interest pays for financing housing purchases.
Investments in REIT trusts have good indicators of total profitability. As a rule, they provide a high level of dividends and have a potential for long-term increase in the cost of capital. REITs total return is likely to be lower than in more risky equity investments and fast-growing companies, and slightly higher than in the less risky bonds.
The average annual total profitability of REITs exceeds on the American stock market by 2.71% per year. Dividend funds are mainly generated from relatively stable and highly predictable rental income under contracts with tenants of premises belonging to the REIT trust.
When rental rates usually rise during inflation, the dividends of REIT trusts are protected from long-term negative effects of price increases. Low degree of correlation between profitability of shares of REIT trusts listed on the exchange and the profitability of other shares and fixed-income investments changes over time. All in all, investing in real estate trusts is a reliable method of having consistent income and a diversified portfolio.