Diversification Benefits Of Asian Reits (real Estate Investment Trust)

Investors see real estate as an indispensable investment class in a well-diversified portfolio; no other investment class provides the same risk-return profile. The reasons are a few: first, real estate brings significant diversification benefits with its low correlations with other asset classes; second, it has a risk premium typically well above the risk-free rate and the return of real estate investments in the past 10 years is more than 12%; third, real estate also hedges against unexpected inflation, with factor such as rent increases providing protection within the inflationary environment; fourth and finally, as illustrated by Hudson-Wilson, Fabozzi, and Gordon (2003), real estate often delivers strong cash flows uncommon with other investments. With all these benefits of investing in real estate, to make the trade of real estate easier, real estate investment trusts (REITs) were created in the US in 1960. The basic idea behind it was to enable investors to accumulate the necessary capital to fund large-scale, income-producing real estate projects in a fashion similar to other equity investments with one major difference - provided that REIT managers return to investors at least 90% of the REIT's cash flows. The REIT is not taxed, in the United States and later on in other countries, at the corporate level. A REIT can be seen as a real estate stock and REITs trade on all the major stock exchanges. In order to list a REIT on a given exchange, the real estate company needs to follow certain rules: 1. Invest at least 75% of its total assets in real estate; 2. 75% of the gross income comes from rents of real property or interest from mortgages on real property; 3. The company has to pay out 90% of its taxable profit as dividends. In general, there are three categories of REITs; one group is comprised of equity REITs; this is the most common kind and makes up about 90% of all the REITs. Firms in this category run both real estate operations and transact in mortgage loans. Another group consists of so-called mortgage REITs; they make up the remaining 10% of the REIT market. Mortgage REITs make loans secured by real estate, but they do not own or operate real estate themselves. The third category of REITs is hybrids; these "hybrids" are in businesses made up of both the equity operations and the lending activities of the first two categories. After dramatic growth of nearly half a century, REITs now represent more than $300 billion in market capitalization in the US. It has become an increasingly important segment of the US economy and investment markets. In 2007, the US, accounted for around 35% of the global real estate markets, and 48% of the listed property sector's available equity market capitalization. With its most attractive feature likely being the most liquid manner with which to invest in real estate, REITs tend to have less risk than many other assets and often bigger long term profits, because most real estate properties are long term investments and the income is quite stable. The efficient frontier study of Ibbotson (2003) tested the influence of REITs on the portfolio; the study used US asset return data from 1972 to 2003, and the finding shows REITs had an attractive tradeoff of risk and return; REITs increase the return and decrease the risk when added to a typical portfolio. (See table 1) Most investment analysts recommend including a REIT in the portfolio nowadays. These investments have the diversification effect within the portfolio, and provide easier access to the asset class; along with greater liquidity than is the case with direct investment in or ownership of real estate.