Book Excerpt for REITs Around the World

REITs Around the World -- Extract

Your Guide to Real Estate Investment Trusts in Nearly 40 Countries for Inflation Protection, Currency Hedging, Risk Management and Diversification

RichardStooker

Cover graphic design by Drew at idrewdesign on Fiverr.com.

The right of Richard Stooker to be identified as the author of this book has been asserted in accordance with Sections 77 and 78 of the Copyrights and Patents Act 1988.

Except for use in any review, the reproduction or utilization of this work in whole or in part in any form by any electronic, mechanical or other means, now known or hereafter invented, including xerography, photocopying, and recording, or in any information storage or retrieval system, is forbidden without the written permission of the author.

All characters in this book have no existence outside the imagination of the author and have no relation whatsoever to anyone bearing the same name or names. They are not even distantly inspired any individual known or unknown to the author, and all incidents are pure invention.

Introduction

"Ninety percent of all millionaires become so through owning real estate." - Andrew Carnegie

Like to travel?

Like to stay and shop in nice places?

Like to make money from your investments?

This book is intended to help you do all three.

"REIT" stands for Real Estate Investment Trust and is a particular form of real estate company which is allowed by law to not pay taxes on the money it distributes to its owners -- and it's required to pay out at least 90%.

This is nearly ideal for income investors. People who bought them up, especially in the middle 1990s when there was a boom in REIT Initial Public Offers (IPO), have made out like bandits.

Today in the US, REITs have become respectable. Not quite stodgy, but even in this bear market their yields are not as high as they were back when only a select few knew about and understood the opportunity they represented.

The new frontier is now REITs outside the United States. Some of them are also established and respectable (Canada and Australia), but other markets are still a wild and wooly frontier.

REITs are great for people who believe the above quote by Andrew Carnegie (and similar ones attributed to other famous people), but are unwilling or unable to invest directly in real estate.

If you buy a second house to rent out, or other properties, you can make a lot of money, but you need:

1. Time to look around for the properties and to do everything else required

2. Negotiating skills

3. Repair and renovation skills (or dependable contractors to do the work for you at an affordable price)

4. Cash and a good credit record

5. Skills to find and keep good tenants

6. To be available, or arrange to have a backup, in case your tenants have problems

7. Enough ongoing cash to keep up with repairs

The risks:

1. Bad tenants can trash your property before the law allows you to evict them (and I've heard of them sneaking back into properties)

2. Your local market can go down in value (and quality of the neighborhood)

3. Destruction of the property (of course you better have insurance, but it's still a hassle at best)

4. You're tied down to the locality

5. If you aren't qualified to be a landlord, or don't want the hassles, you can hire a management company to do the work for you and just send you a check for your net profit every month, but they can be notoriously unreliable. In St Louis years ago, two brothers running a real estate management company ran away to Chile to escape the law. One of them eventually went to jail. The other jumped off a roof. The land owners they stole from didn't get their money back.

6. If you want to sell, it can take months to get your money. In the current economy it can take years.

Unless you're really turned on by being a landlord (some people are), it just makes a lot more sense to tell your broker to buy Real Estate Investment Trust units just as though they were shares of stock.

The success of REITs in the United States did not go unnoticed around the world. It took a few years, but eventually other companies began to pass similar laws.

Nearly 40 countries now have them, or at least have passed the laws. (In a few countries the law has been passed but is being held up by the taxing authority. In a few others, the law is there but no real estate entrepreneurs have formed one, or converted their existing real estate companies to the REIT form.).

Why You Should Invest in REITs Outside Your Own Country

REIT investors should diversify:

1. Geographically

Just as local real estate markets can rise and sink independently of each other, the 2008 financial crisis taught us that can happen to entire countries. The US real estate market was devastated, and many countries in Europe were hit hard. But Canada wasn't affected much at all. Australia also looks to have a great future.

2. Capital flows

US REITs mainly invest in the US, because the country is big enough to hold plenty of opportunity without the risk of leaving it.

But as I touched on in Chapter 37, owning property/REITs in other countries allows you to profit from economic transactions taking place far away in another country or continent.

3. Currencies

The value of the US dollar has been sliding downhill for decades. Even slight inflation adds up over time.

And its near-term prospects seem very bad. To try to prevent a depression in 2008, the US government took on the risk of bad assets from the financial institutions. Plus it's spent a lot of money on various stimulus and buy out schemes.

The US taxpayer is being treated as a bottomless gold mine, but of course we're not. We haven't broken yet, but we're struggling.

The Federal Reserve monetized some of our enormous national debt, directly creating inflation.

And despite all these efforts, the economy has barely budged, and unemployment is the highest it's been for decades.

However, the US dollar looks good compared to the euro which is threatened by the bankruptcy of Greece (and possibly Italy, Spain, Ireland and Portugal) as I write.

The British pound is not getting any press here, but the UK government also owes a h*ll of a lot of money.

And Japan owes something like twice its Gross Domestic Product, which is double the rate for the US. Despite that, currency traders are buying the yen, driving up its value. However, that's nothing to count on, because the Bank of Japan is selling yen like crazy to keep its value down.

Switzerland has the strongest currency in Europe, but the Swiss government wants to keep the franc's value down because it's an export-driven country and a rise in the franc makes it lose money.

However, the economies and dollars of Canada and Australia are looking good right now.

You could buy Canadian and Australian certificate of deposits, but the purchasing power of that interest income would go down in time thanks to inflation. And interest rates in those two countries are very low, as they are all around the world.

So why not get some Canadian and Australian dollar income flows that will go up with inflation, because they come from dynamic, innovative businesses that can raise rents?

Real Estate Investment Trusts

And why not also get some rental income from some of the most promising currencies of the developing countries -- such as Singapore and Hong Kong?

And remember, you don't know the future. Maybe Europe will get itself together, and you'll want a steady stream of euro income from REITs as well.

Whatever happens with Greek government bonds, people in Europe will continue to need apartments to live in and shops to buy food from.

Our Trip Around the World

This book takes you on a tour of those countries. I cover what I can of REITs in each one.

One thing I cannot do is evaluate those countries for their accounting practices and advise you on how to evaluate the REITs.

For one thing, although REITs are trusts in the US and many countries, in many they are other business entities. Accounting practices differ from country to country. I don't pretend to be an international legal and accounting expert.

In some countries the laws aren't being taken much advantage of -- yet. It's easy to forget after the law was passed in the US, it was three years before the first REIT was listed on the stock market.

And even then the industry remained immature -- little known and confused with fraudulent real estate partnerships -- for 30 more years.

The early 1990s gave the industry a big boost because of that period's recession. A lot of high quality commercial properties were foreclosed on and taken possession of by banks.

Who didn't want them - they wanted money.

So the new REITs took the money they'd raised from the stock market and went bargain shopping at the banks.

Many private real estate companies decided it's be to their financial advantage to switch to REIT status, so investors got the opportunity to own a piece of some of the best real estate portfolios in the country.

Advantages of REITs to Governments

In a lot of countries, property sales are private, and kept secret . . . that is, not reported to the government so everybody can avoid paying taxes on the transaction.

Therefore, some governments are passing REIT laws hoping to make their local commercial real estate markets more transparent and tax-efficient.

Some countries suffer from extreme shortages of properties such as residential apartments and houses. The government wants to encourage private investment capital to build more apartments and houses for people, so offers tax-free profits as an incentive.

Our Itinerary

I'll start out covering some basic information on REITs and their professional associations around the world.

Then we'll start on our journey. I'll begin with REITs in the United States, because every trip starts where you already are (you may not be a US resident, but I'm from that country).

Then we'll head north to Canada, then south to Mexico, sail out into the Caribbean, and then south to the rest of Latin America.

Then we cross the Atlantic Ocean to the United Kingdom, visit the rest of Europe, and keep moving East to the Gulf Region, down to Africa, and then on to Asia and Australia, then finish up in New Zealand.

Along the way we'll read a few excerpts from our guidebook.

Then we'll finish up with the most important part -- how you can profit from investing in REITs.

If you wish to learn more about the individual REITs in each country, you can visit my website:

REITs from Income Investing Secrets

There's a page on every REIT I could find substantial information on, and that's almost all of them.

Ready?

First boarding call.

Chapter One

What are Real Estate Investment Trusts

REITs started in the United States as a 1960 law, The Real Estate Investment Trust Act of 1960, part of the Cigar Excise Tax Extension Act of 1960 signed by President Dwight D. Eisenhower. Congress wanted to give small investors a chance to profit from commercial real estate as wealthy individuals and institutions have traditionally done.

The law allows investors to pool their money to acquire ownership interest in real estate properties, without having to own real estate directly -- especially commercial real estate.

Until then, individuals had to own real estate directly. However, it could be difficult for them to raise enough money to buy a second house or an apartment building, and even harder for one person to buy an office building or a shopping mall.

Those who did so needed a variety of skills to make the investment profitable, and they were still at risk from business conditions in their local area. Not to mention having to fix toilets at 2 o'clock in the morning.

The REIT structure in the United States is the blueprint. However, as they've spread around the world -- especially becoming popular since 2000 -- individual countries have come up with their own variations.

What makes them especially attractive for income investors is the provision they do not have to pay federal income taxes on the net income they distribute to unit holder -- and they're required to pay out at least 90%.

Therefore, they generally pay a lot more money than regular corporations -- which are subject to federal income taxes.

In the United States, REIT are trusts, not corporations. Therefore, when you want to invest in them, you buy up units, not shares. You are a unitholder.

U.S. law gives REITs a lot of freedom. They can do almost anything so long as it's related to real estate. They may develop land, build buildings, buy properties, renovate them and sell them.

These are known as equity REITs.

In the United States -- and this is rare in the rest of the world -- REITs may also enter the business of real estate financing. This is primarily for businesses, but some mortgage REITs were engaging in subprime mortgage lending until the 2007-2008 crash. Since that time, some new mortgage REITs have been started to take advantage of the bailout money being offering by the U.S. government to deal with the "toxic" assets -- poor performing mortgages -- on the books of many large financial institutions. This may be profitable for awhile because the US Federal Reserve has pledged to keep interest rates low for the next few years.

A few REITs engage in both activities, so they're known as hybrid REITs.

Many countries impose more restrictions on what activities a REIT may engage in. For instance, many -- though not all -- prohibit REITs from owning property outside that country.

Others have restrictions on development and resale of properties.

In the U.S. and some other countries REITs can be private, which means they're not listed on a stock exchange and available for sale only to Accredited Investors (in the US) -- or publicly listed on a stock exchange where you and I can use brokers to buy them on the secondary market.

For the most part, I ignore private REITs except in a few countries where there're no other REITs to write about.

Some countries allow only publicly listed REITs.

Some real estate companies have chosen to be publicly traded companies, or C corporations in the United States, but not to elect the tax status of REITs. These are known as real estate operating companies, or REOCs. Therefore, a REOC is not required to pay any dividends, just like other companies listed on a stock exchange. Therefore, the share price of a real estate operating company is more volatile, because there's no immediate reward for investors.

Many countries impose leverage or gearing restrictions on REITs, though the U.S. does not. That is, they declare a REIT may not borrow more than a certain percentage of the value of a building. This may prevent them from buying a good building, but is intended to keep REITs on a financially sound basis.

REITs can be very general, or very specialized.

Some specialize by type of real estate -- such as office buildings, self-storage or luxury apartments. Some buy every kind of property from farmland to parking lots.

Some specialize by geography. They'll invest only in Southern California. Some go all over the map.

Because REIT and REIT-like companies -- of course many of them have different names in different countries and different languages -- operate under varying legal structures, I have not attempted to analyze their accounting rules and conventions.

In the U.S., you analyze equity REITs by looking at things such as their Funds From Operation FFO and Adjusted Funds From Operation AFFO. That does not necessarily apply to REITs in other countries.