Investments in Real Estate through Publicly Traded Securities
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Introduction
Historically real estate investing was reserved for the wealthy and institutions. REITs were initially conceived of as a way to make real estate investing more accessible to small investors to gain exposure to a professionally managed, diversified real estate portfolio. REITs were viewed as a type of (closed-end) mutual fund and income passthrough vehicle through which the portfolio manager would acquire attractively valued properties, occasionally sell fully valued properties, and distribute property earnings to the trust’s investors. Legislation was passed in the United States in 1960 to authorize REITs, and the Netherlands followed suit in 1969. The US model and other types of tax-advantaged real estate investment vehicles have been adopted worldwide. T he S&P 500 Index added REITs as a separate Global Industry Classification Standard (GICS) sector in 2016.
Almost 40 countries have REITs or REIT-like structures, and more are considering adopting similar vehicles. REITs are widely held by individuals and institutions alike.
Learning Outcomes
The candidate should be able to:
- discuss types of publicly traded real estate securities;
- justify the use of net asset value per share (NAVPS) in valuation of publicly traded real estate securities and estimate NAVPS based on forecasted cash net operating income;
- describe the use of funds from operations (FFO) and adjusted funds from operations (AFFO) in REIT valuation;
- calculate and interpret the value of a REIT share using the net asset value, relative value (price-to-FFO and price-to-AFFO), and discounted cash; flow approaches;
- explain advantages and disadvantages of investing in real estate through publicly traded securities compared to private vehicles.
1.5 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.