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Thursday, January 15, 2009

Real Estate Investment

Real Estate Investment is now treated as a major case of capital budgeting by using state-of-the-art investment analysis which incorporates the future stream of income it may generate and the associated risk adjustments. It has been the highlight of the investment literature since the 1970’s when investment theorists extended techniques such as probability, time value of money and utility into its analysis.

Real estate is basically defined as immovable property such as land and everything permanently attached to it like buildings. Real property as opposed to personal or movable property is characterized by the right to transfer the title to the land whereas title to personal property can be retained. The investment in real estate essentially depends on the risks associated with it, that is to say, even if the venture succeeds when the future stream of income will accrue to the investor and the alternative investment opportunities. Real estate investment can be attractive if viewed as a business opportunity; it can generate rental income, using it as collateral to secure a loan for a business venture, to offset otherwise taxable income through cash savings on tax-deductible interest rate losses, or simply from the profits garnered from its resale. Notable, in this context is the gains reaped by real estate speculators who trade in real estate futures (by buying and selling purchase options).

Common examples of real estate investment are individuals owning multiple pieces of real estates one of which is his primary residence and others are occupied by tenants from where the rental income accrues. Real estate investment is also associated with appreciation in the value of property thereby having the potential for capital gains. Tax implications differ for real estate investment and residential real estates. Real estate investment is long term in nature and investment professionals routinely maintain that ones investment portfolio should have at least 5%-20% invested in real estate.

A Real Estate Investment Trust (REIT) is a corporation or body investing in real estate that has the property to reduce or eliminate corporate income taxes. In return, REIT’s are required to distribute 90% of their income among the investors. These incomes are often taxable. REIT’s provide a similar function as does Mutual Funds provide for stocks in the share market. The key statistics to study about the REIT’s are the NAV (Net Asset Value) and AFFO (Adjusted Funds From Operation).

The Indian Government is yet to introduce REIT’s in the country. The government and the SEBI (Securities and Exchange Board of India) are planning to bring in legislations for the smooth functioning of the real estate market in India. with Initial Public Offers (IPO’s) streaming in from various listed real estate companies, it will be the best time to have an REIT which can help capture the current boom in the real estate market.
REIT’s provide the opportunity to reap the benefits due to interests in the securitized real estate market. The best benefit that can accrue is the fast and easy liquidation of investments in the real estate market which can be observed in Japan which one of the few economies of Asia along with Hong Kong, Singapore, Malaysia and Taiwan to have REIT legislation in place. J-REIT securities are listed on the Tokyo Stock Exchange and most of the participants are domestic and foreign conglomerates.

The legislation for laying out rules for REITs in UK was enacted by the Finance Act of 2006.they have to distribute 95% of their income and have to be publicly listed on a stock exchange which has been recognized by the FSA (Financial Services Authority). In the USA, the REIT’s are required to pay little or no federal income tax but are subject to legislations put forth by the Internal Revenue Code of 1986 whereby they have to distribute 90% of their taxable income in the form of dividends to its shareholders. Increasing demand for REIT stocks will push up the stock prices and entail growth from internal sources which is evidenced by the figures of 2005 where the combined assets of 200 publicly traded REIT companies totaled $500 billion.

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