With the media focusing on the amazing recovery in stocks and bonds, some investors have overlooked a stable income-generating asset class — real-estate investment trusts, or REITs.
Property offers more inflation protection than bonds because rental growth is linked to the real economy and has low correlation to stocks and bonds. Income can be obtained by either directly purchasing rental properties or by buying REITs.
REITs offer a more flexible, liquid and cheaper option of buying real estate. REITs also had unusually high double-digit total returns in 2009.
Buying exchange-traded funds, or ETFs, such as the SPDR Dow Jones REIT (RWR), which focuses on U.S. real estate with a yield of more than 4 percent and a very low total expense ratio, is one of the least-expensive options.
SPDR Dow Jones Global Real Estate (RWO) and International Real Estate (RWX) offer similar opportunities internationally. RWX is more global and invests in Europe, Asia and Australia. Both international REITs have a much lower average P/E and lower average price/book ratios than the U.S. ETF.
Another option is to invest directly in specialized REITs, such as hotels, student accommodation, healthcare, retail, industrial, residential and offices.
Some REITs are more recession-proof than others. Demand for medical facilities, nursing homes and assisted-living facilities usually don’t have drawbacks, even in periods of recession.
Real estate tends to be neglected as an investment option and is usually U.S. focused. In the past, it was more difficult for an individual to invest in overseas property, but now there are no such limitations.
Markets like Japan and Germany haven’t had much upside even during the recent boomerang. In Japan, the decision by the government to provide liquidity to major REITs has stabilized the market. Credit-default swaps for major Japanese property companies shot up in March 2009 but have since reverted to normal levels.
This environment should offer attractive long-term investment opportunities.
Germany is seen by institutional investors as an attractive real-estate market with low volatility during a period of economic crisis. The preferred property segment is the residential one.
A major merger or acquisition always makes headlines and indicates that there is a new trend in the market.
The recent hostile-takeover proposal by Simon Properties to take over General Growth for an estimated $10 billion indicates that some operators think prices of some sectors of commercial property have bottomed out. While both companies own shopping malls in the United States, only Simon has a strong balance sheet.
Companies with low debt will be in a position to take over weaker rivals such as General Growth, which was in bankruptcy.
Further M&A activity can be expected in the future. Some of the larger better capitalized REITs have recently raised capital that could potentially be used to takeover smaller distressed competitors.
If interest rates will remain low for a few years longer and one has access to borrowing at low rates for income-producing property, it can be a good diversifier to one’s portfolio.
One can duplicate what the REITS are doing — borrowing and financing acquisitions of property.
There is pressure by governments in the United States and Europe on banks to start loaning money, which is a good environment for REITs.
Some of the larger property companies have succeeded in raising capital in the private markets.
The question is, “Do you have time to manage a property portfolio?” If you don’t have that time, investing in REITS is a good alternative.
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