REIT Investing

Most of our real estate investments consist of ownership in REIT equities. But as REIT investor, we have to be conscious of the fundamentals of the direct underlying markets.

Real estate bubbles have existed since the real estate became an asset class. Residential real estate is one area where it more prone to bubble tendencies due opportunities for retail participation.

Sydney house market has been very frothy and is one area we are keeping an eye on. Key indicator of potential weakness in the market includes decline in auction clearing rates. Currently it is hovering just below 90%, if it decline to 70% or 60% then it is a indicator of investor cautiousness in the market.

Housing affordability is the key victim of real estate bubbles. As asset prices gets out of control, potential home owners are priced out of the market or in some instance take on overwhelming debt to get a foot in the door.

They will benefit the most from collapse in asset prices. But on a net net basis, the overall economic impact is negative for the Australia economy.

 

What is a REIT?

Real Estate Investment Trusts (REITs) are traditionally used for holding large real estate assets or a portfolio of assets like malls, office buidlings, industrial warehouses and apartment units. To be classified as a REIT you must obtained a private letter ruling from the Internal Revenue Service confirming that the assets could constitute real estate assets under existing REIT rules.

The rules include condition like:

• Entity owning real estate
• Rental recoved by the REIT is from a separate operator of the property
• 75 percent of the rents must be from real estate assets
• 75 percent of the assets must be real estate assets
• The REIT must have 100 or more shareholders
• 90 percent of the taxable income must be distributed by the REIT as dividends to investors on an annual basis

If above list of criteria is met. The REIT receives a deduction for dividends paid. If not, the REIT is taxed as a regular corporation.