New forms of real estate investment: REITs

According to the latest data published by the Albanian Investment Development Agency in 2019, the broad investment market in Albania in recent years has been focused on several sectors such as:


Manufacturing which is a sector that represents about 5.7% of GDP while occupying about 10.9% of total employment. Having an excellent experience and skilled workforce, Albania offers a great potential to diversify its economy, moving from the textile and footwear industry to the automotive industry.


Tourism is one of the most important sectors which has a great weight for the Albanian economy, employment, as well as for its positive growth forecasts. With a total contribution of 21.2% of GDP, it positions this sector as one of the main contributors to economic development.


Energy given by the fact that Albania has a significant potential of Renewable Energy Sources (RES). Albania is committed to a mandatory target of 42% of energy from renewable sources in the final gross energy consumption in 2030. Energy occupies about 3.54% of GDP .According to her favorable geographical position in the Mediterranean Sea Basin, Albania has a significant potential of renewable energy sources such as water, wind, solar, biomass and geothermal.[1]


 A very important sector is the real estate sector as it turns out one of the best and most reliable forms of investment is real estate. In recent years there has been an increased demand for investment in real estate, such as  lands, apartments or commercial units. This is because in the perception of investors the value of real estate is very likely to increase progressively in the short and medium terms. The benefits that come from investing in real estate offer especially investors a long-term financial security. Owning a real estate property, which you rent for long periods of time, creates a sense of security for investors due to the increase in the value of the property over time. In Albania, the real estate market mainly reflects the classic form of investment in real estate. In the classical form, the investor (whether this individual or company) after a careful assessment of the parameters of the property, chooses to finance through private funds or lending, for its purchase. After obtaining the title of ownership, he directly manages the property and takes care of all aspects related to its periodic maintenance. A more advanced form of real estate investment, which is mainly present in western countries, is investing in specializing companies in Real Estate or REIT.


 


Real Estate Investment Trust or REIT is a company that owns, manages or finances real estate that generates gains .REIT also acts as a financial intermediary who accumulates funds from small individual investors and invests the fund created in a well diversified portfolio into various assets in the form of real estate. REIT companies invest in a wide range of real estate types, including offices, apartments, warehouses, retail centers, medical facilities, infrastructure and hotels. REIT companies directly manage the assets they have in the portfolio by leasing them, then the realized annual profit is distributed in the form of dividends to the shareholders. But what are the standarts that make a company to be qualified as a REIT? Requirements mainly include owning real estate that generates long-term income and distributing the annual profit to shareholders. Specially a company like this should complete some of the requirements which relate to:


·         Investment of 75% of the total assets in real estate ;


·         Payment of a minimum of 90% of gains in the form of dividends to shareholders each year;


·         To be a taxable entity as a corporation ;


·         To be managed by a board of directors ;


·         To have at least 100 shareholders after the first year of existence  ;


·         To not have 50% or more of the shares owned by 5 or less individuals;[2]


We find Real Estate Investment Trust divided into three categories which are specifially:


Equity REITs. Most REITs are equity REITs, which own and manage income-producing real estate. Revenues are generated primarily through rents or sailing.


Mortgage REITs. Mortgage REITs lend money to real estate owners and operators either directly through mortgages and loans, or indirectly through the acquisition of mortgage-backed securities. Their earnings are generated primarily by the net interest margin—the spread between the interest they earn on mortgage loans and the cost of funding these loans.


Hybrid REITs. These REITs use the investment strategies of both equity and mortgage REITs.


One of the points that is most important for investors is the fact of their ability to invest in REIT. An individual can buy actions in a REIT, which is listed on major international stock exchanges, just like any other public stock. Investors can also buy shares in a REIT mutual fund or in funds traded on the exchange. In 2017 there was an increasing investor advice on investing in REITs at 80% compared to 73% in 2016. This is a growing trend as investing through REIT offers a number of advantages which we will treat on this article. [3]


 


 Advantages of investing in REITs


One advantage has to do with the fact that REIT helps to buy and sell real estate by eliminating some of the obstacles that can occur in a normal real estate exchange market. In terms of performance, REIT offers satisfactory returns on investment.


Another positive side has to do with the fact that gain is based on dividends which are usually very high and may be in larger amounts than investments in other forms.


Traditional real estate investments have a higher risk given by the fact that at some point you may have a limited number of properties and these properties can not be rented out for the purpose of earning gains and this leads you to have a limited portfolio. Once you have invested in REIT you will again receive rent from other properties in REIT's portfolio. This reduces your concentration risk and makes your gains more sustainable.


REITS companies have a substantial reliance on investing in real estate, so they will be maximally committed to investing in quality assets, which are able to generate satisfactory gains through renting or selling.


Disadvantages of investing in REITs


Like any other investment, investing in REIT has some negative parts that can put you at risk. First, most REITs trade on public exchanges. As the market price moves, you can lose money if you sell your REITs at the wrong time.


Another disadvantage associated with equity REITs relates to the fact that they operate on investment properties and rely on rental income. So, the strength of the rental demand directly affects the return on investment.


In mortgage REITs the property is not directly owned. Profit in these cases depends on the management strategy to lend at a higher interest rate than their borrowing rate. An increase in borrowing rates or a decrease in mortgage rates could result in a lower profit.


Conslusions


For many investors, REITs offers a unique opportunity to invest in the real estate market. Unlike traditional investments, investments in REIT are convenient, liquid and achievable. REIT companies offer a high annual dividend and stable income. Likewise, investing in REIT has risks, especially if you are investing in REIT mortgage. The best way to reduce risk is by conducting a detailed analysis on the historical performance of the company.


Before making any investment in REITS companies, consult with an investment consultant, who will initially conduct a detailed analysis of your financial situation and portfolio of shares and other assets in your possession. On the following the consultant will come to you in support of a number of recommendations for the diversification of the existing portfolio in order to increase the annual profit rate, through investment in those REITS companies which have a positive performance history.


 


 


 


 


 


 


 


 


 








[1] https://aida.gov.al/sq/biznes-ne-shqiperi/sektoret/energjia




[2] https://www.investopedia.com/terms/r/reit.asp




[3] https://www.reit.com/sites/default/files/media/DataResearch/QuickFacts%20Guide%204-17.pdf