Real Estate Investment Trust –Two Dirty Little Secrets
Most Investors have no read idea what to do with their money and that’s why fund managers and loads of investment instruments have sprung up to cater to this need by the market for “return on investment”. Real Estate Investment Trusts or Asset Securitization which is the legal term of art used to describe the phenomenon of convert asset cash streams into tradable securities and selling them to investors.
This article after a short explanation about REITs, reveals two dirty little secrets that Property Developers play on unsuspecting REIT investors.
Asset Securitization as it is known in the legal industry in its Non-Enron form is legitimate due to the lower cost of raising funds. Property Developers take the chance to put their best properties into the REITs at the start as it would be cheaper for them to raise funds when compared to getting loans from the Bank which would increase their debt and reduce the credit rating for the company. These property developers having effectively sold their properties away, then manage the same properties through their management companies and charge fees. They then take the money to develop and purchase other properties and their capital gets bigger and bigger.
What most REIT investors are not aware of is that, some unscrupulous Property Developers start sneaking in their underperforming assets into the REITs so as to get rid of property duds and the investors in the REITs end up getting poorer returns on their investments. This can diminish your returns substantially.
For example, in Singapore which has one of the most thriving REIT markets in Asia, there was talk that some of the worst properties almost being sold into one of the REITs, before someone intervened to stop this trend. Investors should therefore take more than a perfunctory glance at the Annual Reports and Market Announcements concerning the REITs that they are invested in.
Another thing that most investors are unaware of is the basis of valuation stated in most prospectus documents for REITs. The prospectus is this large document that states out the basis of the investment and reasons why you should invest in it and the risk factors that any reasonable investor should note when purchasing units in the REIT.
For example, there was this REIT Company that wanted to list some properties and when one takes a closer look at the basis that the Financial Analysts calculate the potential rental income, its all guesswork. It took the historical rental income and calculated the potential yield for the investor. That’s why investors should remember the adage of past performance is no indicator of future returns and scrutinize the basis of valuation of any investment that they make be it shares, bonds or REITs.
In conclusion, is your money in safe hands? Are you investing in a REIT today that has ancient property rental return valuations or are you buying into a REIT that has a few good properties in its stable with the rest being duds? Take active control of your money today and you will start seeing more visible returns on your investment.
Copyright © 2006 Joel Teo. All rights reserved.
Joel Teo writes on various financial topics relating to Ahwatukee Real Estate Investment. Signup for his free online Real Estate Investing newsletter today and gain access to the “Six Day Real Estate Investment Profits Course” now at www.realestateinvestment101.info/Ahwatukee.html
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