REITs and risk

Real Estate Investment Trusts, popularly known by their acronym REITs are now one of the most favored investments in recent years. Such securities allow small investors to purchase shares in a few of the largest property empires in the world. These are companies which not only own, but also operate, income generating real estate. What’s more, recent rule changes will only allow them to expand more.

Favorable policies

Favorable tax treatments are extracted by REITs by passing a percentage of their earnings in the form of dividends. Investors, seeing the low interest rates, have been literally dumping money into them. The total market capitalization of American REITs has almost tripled in the recent years, and has surpassed the $1 trillion mark.

REITs have an excellent selling point: their superb dividends. These continue to be almost free of risk. The median yield in REIT in the middle of October comes to 3.9 percent. This is much better when compared to 2.7 percent and 1.8 percent for Standard & Poor Investment Grade Corporate Bond and 10 year Treasuries index.

Stability

It is to be kept in mind that REITs can be regarded as landlords. In such an environment, they will not suffer much even if the economy stutters. According to Neena Mishra of Zacks, they are more stable compared to banks. It is to be kept in mind; however, if a robust economy pushes the feds to increase the interest rates, the REITs will appear much less attractive when compared to bonds. A few analysts already think like this. It is not a wonder that the S&P US REIT index is regarded by many as overpriced as it went up by 59 percent within recent five years.

REITs are regarded by many as relatively speculative instruments. Many investors put only a small part of their total investment money into such investments. In fact real estate attracts only three percent of the Standard & Poor 500 market cap. Laszlo Birinyi of Birinyi Associates, a research firm, is of the opinion that the real estate must have at least six percent of total market investments before it should be taken as an investment of more consequence. At present, it is good to be selective and money should be poured only into better known and bigger brands. One such prominent brand is Public Storage, an owner of self-storage properties. Its shares have dipped 24 percent from April. This was due to intense competition.

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