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REITs - Real Estate Investment Trusts are booming, 23% annual return
Topic Started: 20 Aug 2014, 12:18 PM (1,646 Views)
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Reliable REITs unsung heroes of booming market

August 20, 2014 - 12:15AM
David Potts

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Home owners and landlords aren’t the only ones enjoying the boom in property prices.

Investors in real estate investment trusts (REITs), which used to be called listed property trusts until the rout inflicted by the global financial crisis prompted a name change, have been doing even better. Needless to say REITs are not to be confused with mortgage trusts which are a sad story.

Few properties I daresay would have returned 23 per cent annually over the past three years but REITs did, according to the ASX’s REITs index.

Just think, that was without the hassles of a temperamental toilet, a strata bill to fix concrete cancer, tenants trashing the place or a body corporate complaining about – not that it’s personal of course – you.

And if you need some cash or want to take some profits you just unload some of your holding.

Can’t sell the backyard to fund the next holiday, can you?

All right, so you guessed property doesn’t really do it for me but you have to admit I might be on to something.

Did I mention REITs are yielding around 6 per cent after fees? There can’t be many investment properties which could boast that or we would have heard about them.

Venture past housing and there’s the Cromwell Property Group which pays a quarterly distribution and yields 7.8 per cent, its price marked down because it’s in the unfashionable office sector and has a debt ratio higher than the norm.

The other thing about REITs is that they give you instant diversification. They come in four flavours for a start – residential (such as Mirvac and Stockland), retailing (led by Scentre Group), office (Investa) and industrial (Goodman) – but more to the point, they include a portfolio of properties. In Westfield’s case you even get a crack at shopping malls in the US where the economy is picking up as Australia winds down.

REITs were mauled in the financial crisis for over borrowing to invest in the very places where it hit hardest: the US and Europe. So decimated were they that only 17 are still standing. Sorry, 16 – Australand is being bought out by a Singapore company.

Read more: http://www.smh.com.au/money/investing/reliable-reits-unsung-heroes-of-booming-market-20140815-103jam.html
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miw
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I may be wrong, but I don't think any of the REITs operating in Australia are in the own-to-rent business. They are mostly focussed on the commercial space and even the ones that do residential are mainly developers, not landlords.

There have been a few REITs started lately in the US to do large-scale owning and renting out of properties, but the investing community is skeptical about them being able to do the job efficiently. Time will tell.

The article is inaccurate as to the business these entities are into.
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miw
20 Aug 2014, 02:16 PM
I may be wrong, but I don't think any of the REITs operating in Australia are in the own-to-rent business. They are mostly focussed on the commercial space and even the ones that do residential are mainly developers, not landlords.

There have been a few REITs started lately in the US to do large-scale owning and renting out of properties, but the investing community is skeptical about them being able to do the job efficiently. Time will tell.

The article is inaccurate as to the business these entities are into.
Land tax aggregation rules, negative gearing and cgt discounts for individuals (and closely held companies) mean that the most tax effective structure in Australia for owing and letting resi property is mum & dad owning 1, 2 or, up to, a small handful of properties.

If the rules were equal for institutional investors and funds the bears (and the rest of us) would really have something to squeal about.
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miw
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20 Aug 2014, 02:37 PM
Land tax aggregation rules, negative gearing and cgt discounts for individuals (and closely held companies) mean that the most tax effective structure in Australia for owing and letting resi property is mum & dad owning 1, 2 or, up to, a small handful of properties.

If the rules were equal for institutional investors and funds the bears (and the rest of us) would really have something to squeal about.
Agree about the land tax aggregation. That's a direct cost and would hit a big player fairly hard. Like quite a bit more than double. NG I doubt puts a corporate structure at much disadvantage in terms of their cost base. Yes, it helps with cashflow while you are highly geared and have other sources of cash, but in my analysis it doesn't effect final yield by much. For CGT the corporate structure's effective tax rate before depreciation would be about 30%, while for most investors it is more like 21-22% so the small investor wins there as well.

Where the mum+dad investor can really win out is that they, as owners, are able to put more skill and time into selection of investment properties, adding value and managing costs. IF they do that then they will beat the crap out of a corporate who is reliant on employees of questionable diligence and engagement. BTW this is the same reason why agricultural enterprise is still in its sweet spot at a scale that can be managed and financed by a single family.

A large corporate landlord might, however, be able to have some market power on rents in a particular area so would have the advantage there.
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miw
20 Aug 2014, 03:27 PM
Agree about the land tax aggregation. That's a direct cost and would hit a big player fairly hard. Like quite a bit more than double. NG I doubt puts a corporate structure at much disadvantage in terms of their cost base. Yes, it helps with cashflow while you are highly geared and have other sources of cash, but in my analysis it doesn't effect final yield by much. For CGT the corporate structure's effective tax rate before depreciation would be about 30%, while for most investors it is more like 21-22% so the small investor wins there as well.

Where the mum+dad investor can really win out is that they, as owners, are able to put more skill and time into selection of investment properties, adding value and managing costs. IF they do that then they will beat the crap out of a corporate who is reliant on employees of questionable diligence and engagement. BTW this is the same reason why agricultural enterprise is still in its sweet spot at a scale that can be managed and financed by a single family.

A large corporate landlord might, however, be able to have some market power on rents in a particular area so would have the advantage there.
Negative gearing really just assists with establishment and effectively using external equity to allow the original investment to be established at a very high ROE, e.g., 100% debt or close to it (if you accept the PPOR equity pledged as a sunk cost). A corporate player would never be able to do that.

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miw
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20 Aug 2014, 03:47 PM
Negative gearing really just assists with establishment and effectively using external equity to allow the original investment to be established at a very high ROE, e.g., 100% debt or close to it (if you accept the PPOR equity pledged as a sunk cost). A corporate player would never be able to do that.
Agree that a corporate player would not be able to do that, but they would not be able to do that, NG or no NG. taking advantage of NG requires an external cashflow and does not scale well - even for small PIs. On the other hand these large corporates do have a big advantage in raising equity.

I still agree with you that the small player has an advantage. The investment community seems to as well, because real residential REITs (as opposed to residential developers) are nonexistent in Australia and very uncommon in the US. Very big landlords are quite common in Germany, but I have no idea of their ownership structures.
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I had a friend who had a fortune trapped gambling on these when the gfc came along. Back then they were called listed property trusts but you have to change the name when they shit themselves don't you. 23%, leveraged to buggery, come in spinner :lol

Read all about it here.
http://m.smh.com.au/money/investing/turnaround-rebuilds-trust-20120828-24xpo.html
Edited by goldbug, 20 Aug 2014, 08:05 PM.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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miw
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goldbug
20 Aug 2014, 07:58 PM
I had a friend who had a fortune trapped gambling on these when the gfc came along. Back then they were called listed property trusts but you have to change the name when they shit themselves don't you. 23%, leveraged to buggery, come in spinner :lol
Dunno about oz REITs, but all you needed to do with the US REITs was hold onto them and you'd be well up now. The corollary to "buy when there is blood in the streets" is that you do not sell when you do get caught in the fighting.

I'd say the name change was mostly to bring the naming in line with the rest of the world, which has always called them REITs.
The truth will set you free. But first, it will piss you off.
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The oz trusts went up double digits for years too. Everything goes up amazingly until it crashes. What screwed them here though was the governments guarantee on savings in the bank. Everyone freaked out in 2008 and tried to move their capital out of "anything" and into a bank account that was covered by the deposit guarantee. The mass redemptions froze the lpt's overnight. And then the market began to fall, and then the leverage caught up with them.
Shadow was hopelessly wrong about the Gold Bull Market.
What else is he wrong about?
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miw
20 Aug 2014, 03:27 PM
Agree about the land tax aggregation. That's a direct cost and would hit a big player fairly hard. Like quite a bit more than double. NG I doubt puts a corporate structure at much disadvantage in terms of their cost base. Yes, it helps with cashflow while you are highly geared and have other sources of cash, but in my analysis it doesn't effect final yield by much. For CGT the corporate structure's effective tax rate before depreciation would be about 30%, while for most investors it is more like 21-22% so the small investor wins there as well.

Where the mum+dad investor can really win out is that they, as owners, are able to put more skill and time into selection of investment properties, adding value and managing costs. IF they do that then they will beat the crap out of a corporate who is reliant on employees of questionable diligence and engagement. BTW this is the same reason why agricultural enterprise is still in its sweet spot at a scale that can be managed and financed by a single family.

A large corporate landlord might, however, be able to have some market power on rents in a particular area so would have the advantage there.
Also with the CGT, the 21-22% for individuals is final, whereas with companies are 30% and if you want to get it out of the company as either a distribution (dividend) the recipient will need to top-up to their marginal tax rate and if you do it as a capital return or sale of shares in the company there may be a secondary level of CGT on the share appreciation.

Those in this thread talking about failed REITs - I believe that those were limited to developers not simply buy and hold. Developments are obviously more risky and potentially higher return. Different investments really.
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