REITs: A failed investment avenue or the next big opportunity?
mutual fund kind of product. It’s neither. You need to think of a REIT as a basket of commercial/office property, that is leased out to earn a rent.
The properties the REIT owns are not tradeable per se, so there’s no capital appreciation available to you in case there was a spurt in property prices. However, higher property prices over time, will lead to higher absolute rentals. So, at the risk of oversimplifying, the only thing you really earn is the rent.
Having said that the properties do have a value attached to them. That’s kind of factored into calculating the value of each unit i.e. the Net Asset Value (NAV).
The opportunity here is that if you know the true value of the asset, and you can buy it at a 35% discount, you are in good place. And since you buy it lower than the NAV, then your rental yield is even better. Makes sense? Now there are many kinds of REITs, but we are dealing with only the plain vanilla REIT here (some REITs by the way, including Embassy, also own hotels).
Second, there is confusion in the way income from REITs is taxed in the hands of the investor. Even though I owned REITs, I could not figure this out fully. Perhaps that was also because there were changes being made at that point in time.
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