Updated: November 15, 2022
What are Real Estate Investment Trusts? How do you invest in REITs? Is this a good investment? How risky is it to invest in REITs?
Real Estate Investment Trusts have been in the local news in recent months. That’s because as of writing, the Philippine Securities and Exchange Commission (SEC) is already finalizing the guidelines for REIT investments.
Moreover, Ayala Land Inc. (ALI) is hoping to list the first REIT in the country, which will be a decade after Republic Act No. 9856, or the REIT Act of 2009 was implemented.
So, if all happens according to schedule, Ayala Land will start offering REITs by 2020.
Update: AREIT has already launched on last August 13, 2020. This article was originally written in November 2019.
What are Real Estate Investment Trusts?
REITs or real estate investment trusts give individuals, like you and me, the opportunity to earn from investing in real estate.
Just like mutual funds, a REIT is a corporation that sells stocks, which you can buy. And as a shareholder, you earn a portion of the income produced by the REIT from its real estate investments.
Imagine earning rental income without actually buying a property!
REITs are often classified as either an Equity REIT or a Mortgage REIT. Equity REITs own a wide range of real estate properties and derive most of their revenue from the rental on those properties.
Mortgage REITs, on the other hand, may finance real estate projects and will get most of their revenue from the interest earned on their investments in mortgages or mortgage-backed securities.
You can buy shares of a publicly-listed REIT through a stock exchange broker. Or buy shares of a private REIT directly from the company.
Regardless of the type, REITs operate under a specific set of rules. And that is:
- It works like a mutual fund.
- It is a corporation that has the license to solicit or offer investments.
- Its shares must be widely held by shareholders.
- It must primarily own or finance real estate.
- It should own real estate with a long-term investment horizon.
Investing on REITs
There are hundreds of REITs globally, as well as indices and other derivatives, which you can invest in.
This means that you don’t have to wait for the SEC to finish the guidelines for Philippine-based REITs if you want to earn from Real Estate Investment Trusts.
For example, there’s the iShares Core U.S. REIT ETF (code: USRT). This is an Exchange Traded Fund (ETF) established in 2007 that follows the 50 largest REIT companies within the FTSE NAREIT Composite Index.
FTSE means the Financial Times Stock Exchange. While NAREIT means the National Association Of Real Estate Investment Trusts.
How do you invest in the USRT?
You can do that through global multi-asset broker, eToro. And you can buy and invest in shares of USRT with as little as $50 through them.
USRT vs PSEI vs ALI
I was curious as to how the performance of the iShares Core U.S. REIT ETF compares to that of the Philippine Stock Exchange Composite Index and that of Ayala Land’s stock prices.
So, below are the charts of the share prices from December 2014 until October 2019; or roughly five years.
USRT or the iShares Core U.S. REIT ETF
PSEI or the Philippine Stock Exchange Composite Index
ALI or Ayala Land Inc.
Honestly, it’s difficult to draw any conclusion from just looking at the charts. So I did an investment simulation to check how much I would have earned if I invested in each of these for 5 years.
I did a cost averaging strategy. Starting on December 1, 2014, and every month after, I calculated how much my investment would have gained (or lost) until October 30, 2019.
Below is a summary of the results:
As you can see, my investment would have grown by 28.58% after 5 years in the USRT or the iShares Core U.S. REIT ETF, which is better than the performance of the Philippine Stock Index and Ayala Land (Download the computation here).
In other words, if I invested P10,000 ($1 = P50) every month on each of the three investments starting December 2014, then by October 2019, the value of my investment would have been:
- USRT or the iShares Core U.S. REIT ETF: Php 758,592.76
- PSEI or the Philippine Stock Index: Php 619,955.85
- ALI or Ayala Land Inc.: Php 731,371.41
Of course, this doesn’t take into account the stock and cash dividends that I would have received from having shares of Ayala Land. But in any case, I find the results quite exciting.
Because I’ve discovered a good way to diversify my investment portfolio. I can go beyond the Philippine economy and earn from the growth of other countries, such as the US economy.
I’m excited and waiting for the SEC, and subsequently, Ayala Land to launch their Real Estate Investment Trust. I will most likely buy shares and invest in them. It will be a good addition to my long-term investment portfolio.
Unfortunately, based on my experience on the Personal Equity Retirement Account (PERA) and Exchange Traded Funds (ETF) in the Philippines, it could take some more time before this is formally launched.
Just consider, the REIT Act was ratified back in 2009 – that’s 10 years ago, and yet the rules are still being finalized as of writing.
Thus, in the meantime, I will check out the iShares Core U.S. REIT ETF (code: USRT), as well as other indices and REITs on eToro such as the Vanguard Real Estate ETF (code: VNQ) and the SPDR Dow Jones REIT ETF (code: RWR).
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