- Real Estate Investment Trusts (REITs) must ensure a clear investment horizon in their structure and focus on real estate properties intended for leasing.
- Despite global challenges caused by inflation and rising interest rates, REITs have demonstrated resilience.
- FlexFunds plays a crucial role in enabling the conversion of assets, such as REITs, into exchange-traded products (ETPs).
In the broad spectrum of real estate investments, Real Estate Investment Trusts (REITs) are among the most common choices within asset managers’ portfolios. Asset managers use these vehicles for portfolio diversification, offering indirect exposure to clients in these alternative investments.
REITs are a type of publicly traded investment vehicle that allows investors to acquire shares in properties without the need to manage them or bear associated costs.
Returns from this type of investment instrument are generated through income derived from managing these properties, such as lease contracts and their appreciation, as explained by FlexFunds, a leading provider for asset managers in designing and issuing investment vehicles.
How are REITs structured?
These investment vehicles are structured as representative securities or certificates purchased by investors to become virtual owners of a diverse basket of properties, ranging from commercial to residential and industrial real estate.
REITs are characterized by providing constant liquidity and being a hybrid instrument, combining elements of fixed and variable income in their structure, allowing portfolio diversification and risk mitigation.
In simple terms, REITs must ensure a clear investment horizon in their structure and focus on real estate properties intended for leasing, whether they have acquired or built a property from scratch.
REITs are formed with funds from various investors to acquire different types of real estate, such as apartments, hotels, or shopping centers, generating returns through leasing and appreciation.
They must also invest 70% of their assets in real estate and distribute 95% of their annual profit among certificate owners, according to information from the consulting firm Deloitte.
FlexFunds plays a key role in the evolution of real estate investment strategies by enabling the conversion of assets such as REITs into exchange-listed products known as exchange-traded products (ETPs).
This not only provides greater liquidity for investors but also facilitates capital raising, especially from international investors. Through its Flex Private Program strategy, FlexFunds simplifies the real estate investment process and provides access to the global private banking sector, allowing participants to expand their reach and attract investors from around the world.
“It is a FlexFunds solution that allows developers, managers, and real estate funds to transform illiquid assets into securities with greater liquidity and more accessible trading,” explains FlexFunds.
Role in Portfolio Diversification
Investing directly in a hotel or commercial property is generally a limited option for investors with significant capital. However, instruments like REITs open the door to more participants in the real estate market with lower amounts.
In times of high inflation and market volatility, investment managers and their clients tend to seek refuge in assets considered lower risk and, in some cases, benefit from a context of rising prices.
In the specific case of REITs, lease contracts are typically negotiated under the agreement that rents will increase in line with inflation. Therefore, in the current environment, managers of these properties can benefit.
The National Association of Real Estate Investment Trusts (Nareit) highlights that historically, REITs have outperformed the average during periods of inflation, such as those currently faced.
This vehicle allows investors to participate indirectly in the real estate market. There are over a thousand real estate investment trusts worldwide, distributed across 40 countries.
In a challenging macroeconomic environment, managers also turn to asset portfolio diversification to mitigate risk and expand their reach in international banking.
According to FlexFunds‘ program experience, the ability to convert real estate assets into exchange-listed products not only improves liquidity and accessibility for investors but also provides an efficient way for managers and developers to expand their global reach.
With REITs, diversification is sought as these instruments invest in different types of properties and sectors of the economy, all converging in their ability to generate stable and recurring income.
REITs also focus on projects in different locations or geographies, providing diversification from this perspective to shield against specific situations that may arise in the real estate sector of a particular country.
REITs in a high-interest rate environment
Despite global shocks caused by inflation and the consequent rise in interest rates by central banks to contain it, these real estate investment instruments have remained resilient.
The period of high global interest rates has been marked primarily by the increased cost of credit and, consequently, greater difficulties in property acquisition. At the same time, investors prefer fixed income to safeguard themselves and take advantage of interest rates.
These investment vehicles have also felt the impact of higher interest rates, as they must assume more attractive dividend rates and likely face fewer investment inflows when competing with other alternatives such as bonds.
Nareit highlights in a recent report that as the Federal Reserve reaches the end of its tightening cycle, these instruments “will likely begin to recover in 2024.” It emphasizes that the performance experienced in October and November may start generating tailwinds for 2024. For the entity, this could “be a signal that, as in previous periods of monetary policy adjustments, the end of the rate hike cycle will herald a period of superior performance” for these investment vehicles.
Sources:
- https://www2.deloitte.com/content/dam/Deloitte/mx/Documents/bienes-raices/FIBRAs_Resumen_Ejecutivo_2014.pdf
- https://www.reit.com/news/blog/market-commentary/how-rising-interest-rates-have-affected-reit-performance
- https://www.reit.com/news/blog/market-commentary/2024-reit-performance-outlook
