Wednesday, January 2, 2013

Why Invest in REITs

The growth of the real estate securities market around the world has led to a discrete asset class known as real estate investment trusts (or REITs).  While the United States was probably the first country to introduce such an asset class, REITs  are fast catching on in various European and Asia Pacific countries.  There are over 20 REITs listed on the Singapore stock exchange today.  And REITs do make a compelling asset class of their own.  Today, let's look at some of the reasons to invest in REITs.

Diversification Benefits

REITs are known to have a low correlation with stocks and bonds.  This means that it does not move in tandem with other investments and can thus be used to reduce an overall portfolio's risk.  Portfolios that contain a small allocation of REITs have higher returns and lower risks compared to a portfolio that contains only a mixture of stocks and bonds.

Apart from diversifying away from stocks and bonds, REITs also allow real estate investors to diversify away from just the domestic real estate market.  Besides this, investors also have a wide range of different kinds of properties to invest in.  This includes industrial, residential, retail, office and even hospitals.  So apart from allowing a property investor to diversify across different countries, REITs also allows one to diversify across different property types.

Liquidity Benefits

Besides diversification, REITs also offers liquidity.  Not only can investors own a small piece of real estate with a small capital outlay, this asset class is also traded on the stock market where one's investment can easily change hands.  An investor thus does not have to worry that he or she might not be able to sell the investment.  And with the market price known, an investor will always know how much their investment is worth.

Income Benefits

With many baby boomers hitting retirement age, they seek out a portfolio that will give them investment income similar to bonds.  REITs allow them to collect income via the distributions that are paid out.  This dividends or distributions makes it an attractive asset since it literally puts money into one's pockets.  In today's low interest rate environment, REITs often trade more than 2-3 percentage points above the risk free rate that one can get from holding AAA government bonds.

Conclusion

REITs as an asset class is increasingly gaining popularity.  They provide diversification, liquidity and income benefits while allowing investors to be exposed to the real estate market with very little capital outlay.  Why do you invest in REITs?

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