lazy question

justme111 wrote: »

REITS - are they options for diversification from equity investments

Yes

or do they move in the same direction anyway ?

They might.

When you buy a share of a REIT you are buying equity shares in a business whose business plan is to hold property.

Once you have bought the shares - as with a share of any company you might like to buy - the value of your share certificates on the open market will go up or down based on the market appetite (supply and demand) for shares of all companies in general, and more specifically those types of companies, and more specifically, that particular company we're talking about.

If the REIT has 500 million shares in issue and you own 500 of them, you own a millionth of the company. But the value of those shares on the stock market will not necessarily be a millionth of the value of all the company's properties and other assets and liabilities. Much like the value of a share in Tesco isn't going to be purely the value of its buildings and shelves and things on the shelves and in the warehouses and vehicles and cash in its bank and debtors less what it owes its suppliers. And a share in Lloyds Bank isn't going to be worth what assets are on its balance sheet less what liabilities are on its balance sheet at a point in time.

People buying and selling those shares consider not only what assets the business has today, other things: what sort of decisions will be made by the company management for better or worse in the future, what will happen to the wealth of the customers who are giving them their revenues, what will happen when it's time to refinance the debts, whether the company has plans to develop what it is doing further and what does the company's pipeline of new business opportunities look like. All of these will affect future potential profits and dividend flows and impact the price you have to pay, which is also impacted by what you would have to pay for other businesses (whether the other business is a directly comparable rival or not) and generally what the mood is for buying shares in companies full stop.

So, as a share of a REIT is a share of a business, even if it owns a shopping centre and a warehouse and an office block valued six months ago by a surveyor at £x in total, your one-millionth ownership share of the REIT is not going to be valued by the stock market at exactly £x divided by a million at a point in time.

For example, your shares can fall heavily in value when everyone in the stock market is running off to the relative safety of bonds and cash and the prospects for companies worsens due to an economic downturn (emptier warehouses, retailers unable to pay so much rent, businesses making layoffs or at least not wanting to move to bigger and better offices). And your shares can rise when other equities rise again. But also, your REIT shares might also be expensive when bonds are expensive and interest rates are low because investors may have great demand for ongoing decent dividends such as what can be produced from stable rental income, and when investors think the company has the potential to reduce its borrowing costs or add more cheap gearing to get more income. Which means the shares in the REIT may become cheaper when interest rates rise and bonds become relatively cheaper as alternatives for investors' money.

So, REITs can go up and down when 'shares in general' go up and down, there will typically be some correlation; and they can also go up and down when bonds go up and down, perhaps some correlation there too. Commercial property is an asset class in its own right. But commerical property accessed through a company who holds the property and is themselves listed on the stock exchange, does not give you the 'pure' return of the property itself, it gives you the return of the shares of the property investment company. It can however be an effective and efficient way to buy the property (compared to an open ended fund) because the property investment manager does not have to worry about potentially needing to liquidate the portfolio to meet redemption requests.

I suppose really, you have to consider before you buy this 'company that holds commercial property', do you already have sufficient exposure to 'companies that hold commercial property' alongside your 'companies that make computer software' and 'companies that make cigarettes' and 'companies that offer banking services', 'companies that drill for oil', 'companies that generate and distribute electricity', 'companies that make and distribute drugs and health services', automotive, leisure etc etc.

There is no doubt that all of these companies will have different prospects in different parts of an economic cycle and even if their shares go up or down in price at similar times, it's fundamentally different being the landlord of a retailer or haulier or manufacturer or insurance business or care home, than it is to actually be that business who leases the property from the landlord on a long term basis.

So yes, of course REITs can offer diversification from other types of shares you might like to hold. If you buy an equities tracker you might only have a couple of percent of that money in REITs through the natural exposure that the index has to those entities, and you might prefer more. Some people prefer to use open ended funds where the price of a share is a purer representation of the underlying properties' alleged value, but such funds may freeze subscriptions or redemptions during problem periods to protect the investors from needing to grow or liquidate the portfolio.