How REITs Grow In 4 Key Ways

By on May 14, 2014

When you are vested in REITs, your primary focus is to collect cheques every quarterly, bi-annually, or annually. But this does not hide the secret longing you have for the prices to appreciate. Wouldn’t the double-whammy of dividends and capital appreciation be something to boast about. The good part is that dividend are guaranteed as long as the real estate operations under the fund is profiting. Authorities who draw up the parameters of how these funds are manages actually have rules that require a certain percentage of profits to be distributed to investors. The other part which you have no control over is unit price appreciation.

As long as the REIT grows, there will be more demand for it in the public. And when that happens, the simple concept of demand and supply should slowly push up the unit price just like how shares in the stock market work. There are 5 key ways a REIT can grow. And you can admit it, you are not going to start your own REIT.

Increase in rental

Most people will understandably feel that increases in real estate values will undoubtedly increase the value of the REITs. This might be true to a certain degree, but it does not have as big an impact as increase in rentals. There is a reason why we seem to only hear about increases in commercial rental instead of decreases even when markets are going down. The reason being that a huge chunk of commercial properties, especially retail malls, are controlled by REITs. Sponsors will also play a part in some way.

As the pressure to appease investors rate of return expectations, the easiest way is to accumulate more rental income. And as mentioned earlier that dividends are based on the amount of profit generated, higher rentals means higher pay cheques.

Acquisition activities

It does not take a beautiful mind to comprehend that selling a loser of a property to buy a winner is going to help a REIT grow organically. As the managers of REITs are constantly having an eye on the bottom line, they can be tempted to acquire new properties by disposing existing ones when a good opportunity arise.

Again, investors expectations will play a huge role in the direction that is chosen. Worst come to worst, if an assets is indeed bleed cash like a burst artery, selling it off and distributing the collections to investors will look like the pragmatic choice of action to take.

Should acquisitions require more funds that cannot be generated by selling existing assets, those funds can be borrowed from a lender or by expanding the REIT. Since real estate can be tough to accurate predict, it will take some convincing to persuade stakeholders to take the risks involved with such acquisitions.

how to grow a reitUpgrading and concept changes

You might think that some mega malls are owned by well-known developers who have their company marquees installed at the highest point of the buildings. Many times, these are just misconceptions. Many times, the malls are owned by REITs and the branded developers are just the managers of the trusts or the operation of the building.

As the worst nightmare of stakeholders is that a mall flops very badly, drastic measures or divine intervention might be required to turn things around. This is why we often see major upgrading words or concept theme changes occurring at prime locations around.

For example, a mall with a children’s theme is hardly going fulfil it’s full potential when the location is smack right in the center of the city. Rebranding it to luxury retail mall can fully turn the tables on the performance of the venture. The most profitable buildings are often those that cater to a very specific niche by the way.

Greenfield Projects

Greenfield development is just a fancy name given to construction projects where there are little to no constraints posed as a result of existing infrastructure or buildings. Simply put, it is the development of new or undeveloped land. But because of the constrains that REITs work within, there might be very strict regulations on how much can be spent on these projects. The number usually arrives as a percentage of the fund’s asset value.

Why take on such hassle and challenges? Because there is a potential for high margin returns. It is like buying your stocks from the manufacturer rather than the wholesaler. You can expect better margins when remove parties in the supply chain.

In closing, it must be mentioned that if you are considering investing your hard earned money on REITs, stability must be one of the big factors that you value. This stability is about dividends and the ever-valuable nature of real estate. If growth is something that your focus is on, you might be better off looking for other forms of investments that has a focus on it.



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