Words of Caution for REITs Investors

Words of Caution for REITs Investors

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Beauty may be in the eye of the beholder but property assets need checking up on and that is especially true for UK investors, for many of whom, REITs will be a new form of investment, only available since the beginning of 2007. While some of the new UK REITs will be the giants of the county’s property sector, such as Land Securities (converting from a listed company to a REIT), the investor needs needs to have as detailed a picture of real estate held in the REIT as possible. Land Securities, for example, has been adversely affected by a concentration retail property holdings making vulnerable to the least profitable segment of the property market.

It is to be hoped that UK REITs will tend towards the large end of the range if investor confidence in this of investment is to take root. However, whatever the size of the REIT, there’s no avoiding to follow press comment about it’s performance in general, the calibre of the management and specific properties in its portfolio. The likes of Land Securities and British Land are not going to sink below the sights of the financial press (or sink at all, hopefully) but there may be issues of transparency when considering a REIT that’s one of a succession of investment vehicles promoted by the likes of real estate investment management companies, a model that is fairly common abroad. In these instances it’s essential to find out as much as possible about the quality of the assets going into the REIT from prospectus to try to identify any ‘bad egg’ diluting the potential of the investment.

In connection with the distinction between these REIT variants, the UK regulatory situation is that REITs have to be formed out of main-market quoted companies. Whether this implies that no further UK REITs will come into being after the property sector of the London Stock Exchange have converted themselves remains to be seen.

As far as the UK ‘sub-species’ of REIT is concerned stock exchange rules protect the investor in the following ways:

  • A published investment policy is required (and has to be approved by shareholder meetings)
  • Changes to the risk profile must be published to the market
  • Strict limits on investments in other trusts
  • Assets equating to 25% of more of the value of the company require shareholder approval

Unlike unit trusts and investment trusts, UK REITs do not come under direct supervision by the Financial Services Authority (FSA) and investors do not recourse to the Financial Ombudsman in instances of mis-management of a REIT. The FSA’s chief interest in REITs is in the supervision of the ADVICE that financial advisers hand out about them to their clients (read more about this on the FSA website).

Examples of valuation problems in property investment vehicles include the Deka Immobilien scandal when a Deloitte & Touche audit in 2004 revealed that the company’s portfolio had been overvalued by 530 million Euros and dented confidence in open-ended property funds overall. The sage investor will also be careful to keep an eye of a REIT’s rental income and its occupancy rate. Awareness of the bigger picture is also vital so that advance warning of upcoming problems or opportunities in the market are heeded. One final tip regarding REITs is to take note of what the rating agencies are saying about them. For example, Fitch have a REIT surveillance group, monitoring the gearing of individual REITs and spotting trends in the sector as a whole.