In his book The Ascent of Money, historian Niall Ferguson talks at length about the English-speaking world’s obsession with property as an asset class. How do we teach children about the game of property? By literally getting them to play a board game — Monopoly. Many people freely admit that they do not understand how the stock and bond markets work, to say nothing of more esoteric types of securities markets. But everyone has an opinion on the property market.
This is partly because the idea of living in a property is easily accessible and intuitive to the vast majority of investors. A house is a tangible asset that does not go anywhere — in many languages, like German and Russian, the word for real estate literally means ‘immovable’. If rented out, it can provide its owner with a steady, reliable stream of cash payments. And it tends to appreciate in value over time.
It is for these reasons that many investors want to gain exposure to the real estate market. Unfortunately, real estate also tends to be prohibitively expensive for most investors, certainly if you want to acquire a diversified portfolio of real estate. If I were an investor faced with this problem, I would consider investing in REITs for the following reasons.
They offer excellent yields
In order to qualify for their tax-privileged status, REITs by law are required to distribute 90% of their income to shareholders. For instance, shares of Landsec currently yield 5.46%. Landsec owns and operates, among other properties, the ‘Walkie Talkie’ building at 20 Fenchurch Street in the heart of the City of London, as well as commercial spaces across the UK.
Access to unusual types of property
As mentioned, one of the problems with investing in real estate for the majority of people is that diversification becomes tough when you can only afford a single property. But another, sometimes-overlooked, fact is that the property market is not a static monolith. Different types of real estate go through periods of varying performance. For most investors, residential property is the only type of real estate they can realistically invest in. However, with a REIT, you can access property markets that you might not otherwise have been able to. For instance, Shaftesbury operates a large portfolio of commercial real estate in the West End of London.
Generally lower volatility
Because they are asset-heavy businesses, REITs typically display lower volatility than other stocks. Of course, real estate as an asset class has gone through some big swings in the last 20 years, but generally speaking, there is a limit to how far the value of property can decline, particularly when we’re talking about the centre of a major city like London. In contrast, many non-REIT stocks are valued not based on their tangible assets, but on some future growth projection, a far more ephemeral idea than bricks and mortar.
