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REITs - Choosing the right one and Return comparison

Proper due diligence is a must before investing in any asset. We are now clear with the pros & cons and taxation of REITs. This last part will finish up all that is remaining for you to invest in an REIT.

How to choose a good REIT –
Choosing the right REIT is very crucial. An investor must do proper due diligence before investing his/her money. The following points will guide you in making an informed decision - 

 1. Management - The investor should investigate the track record of managers of the trust to see whether they have any experience in managing any successful REITs, and if yes, what returns did the REIT give to its unitholders.
You should also investigate the compensation given to the managers. If its performance based, chances are that they would be looking out for your interests by aiming to get the best possible returns in the prevailing market conditions.

 2. Diversification - The REIT should be properly diversified in its holding of real estate assets. A concentration on one asset class can severely impact the performance of the trust in case of unfavorable market conditions. Diversification assists in balancing the portfolio of the trust.
The trust should also have access to sufficient capital to fund its growth

 3. Earnings - Earnings are the metric that ultimately determine the success of a REIT. Unlike listed companies, the gauge the earnings of a trust, the two metrics to be checked are - Funds From Operations (FFO) and Cash available for Distribution. 

FFO is a measure of cash generated aby the REIT. FFO compensates for the accounting methods that may inaccurately communicate the REITs performance. Many investment properties appreciate over time, making depreciation inaccurate in describing the value of the REIT. Depreciation and amortization is added back to the net income to reconcile this issue. 
Any sale of assets is also subtracted from the net income because that is a non-recurring income.

Traditional metrics of EPS and P/E ratio are not reliable in estimating the value of an REIT. Instead, Price-to-FFO and Price-to-AFFO multiple are used to get a better picture of the performance of the trust. 

REIT returns in comparison to all other asset classes –
A study conducted by research firm CEM Benchamrking Inc compares the annual average returns net of all investment costs across 12 aggregate assets classes across a period of 20 years commencing from 1998 to 2018.

These asset classes include – 
1. Private Equity
2. Listed Equity REITs
3. U.S. Small Cap
4. U.S. Large Cap
5. Non-U.S. Stock
6. U.S. Long Bonds
7. Unlisted Real Estate
8. Other Real Assets
9. Non-U.S. Fixed Income
10. U.S. Broad Fixed Income
11. Hedge Funds
12. U.S. Other Fixed Income
The results of the study conclude, out of 12 assets classes researched, Listed REITs had the second highest gross return of 11.4% and the second highest average net return of 10.9%, the first being Private Equity.

You can read the complete report here. 

This wraps up our REIT investment series. Going through all these articles before making an investment decision regarding REITs will enable you to make an informed decision which will pay off in the long run. 

Any feedback is welcome and appreciated. 

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