You are constantly being told to diversify your portfolio to mitigate risk. Common instruments include stocks, bonds, and mutual funds, all of which have varying levels of risk and returns within each group. But most have underlying factors that are affected in similar ways, so although you may feel like you’ve spread your risk exposure, there may be more that you can do.
“Real estate is always a good option to consider when diversifying your portfolio, but not everyone can make a large capital outlay that most real estate investments require,” explains Richard Cayne of Meyer International. “But real estate investment trusts, or REITs, open up a vast array of real estate projects to an individual investor.”
For a much smaller expenditure, you can invest in real estate projects that you may not normally have access to. And, because they have distinct differences to other equity or bond instruments, REITs offer another level of diversification to your portfolio.
REITs: a definition
Some would describe REITs are a type of mutual fund because they invest in many different types of real estate while allowing those investing in them to buy and sell stakes like a mutual fund or a security. REITs can be traded on open exchanges, but there are also REITs set up for private investment.
Depending on its jurisdiction, a REIT can also invest outside the real estate sector, but it must maintain a specified majority in properties. And, depending on the type of REIT, the REIT often must also manage the real estate in its portfolio as well. These properties can range from apartment buildings and shopping malls to farmlands and forests. So, the dividends could come from the underlying value of the property or from income from the property (rents, produce or timber sales).
When we speak of “investing” in real estate regarding REITs, this usually means one of two things. A REIT could be investing in real estate directly (or as an “equity REIT”), taking ownership of properties. Or, a REIT could be investing in real estate financing, so it would be investing in mortgages or mortgage back securities. So, the emphasis would shift a bit – the property’s value is still key, but it’s ability to afford its financing would be a significant factor.
Which REIT where?
Currently, there are over 30 countries that have laws allowing for REITs. Although all REITs have similar structures, each country will no doubt have their own regulations and processes. The European Public Real Estate Association has a database of surveys focussed on regions and specific country’s REIT regimes. The US-based National Association of Real Estate Investment Trusts
Navigating through these myriad sets of rules may be daunting, so if you would like someone to go through the various options to help you determine if REITs are an option for you, and, if so, which ones would suit you best, Richard would be happy to help you.