FPFIG Real Estate Investment

Investing in residential, commercial and industrial real estate properties is a prime activity of FPFIG.

Real Estate Investment Trust, REIT is the newest investment channel of FPFIG, It was established to invest exclusively in real estate properties in China, one of the fasting growing real estate markets in the world.

The reason why real estate investment trust have a long history in the USA, where there exists the established and proven legal, financial and marketing infrastructures required to protect the investors, especially if China real estate portfolios are involved.

A REIT usually has a pool or portfolio of real estate which is securitized for consumption or investment by the institutional and retail investors. With a USA based REIT its dividends and earnings are tax-free at the REIT level, provided more than 90% of these are distributed to the investors, who may or may not be required to pay tax on such distributions, and double-taxing is avoided. See the REIT Primer section below of a more detailed explanation about REIT.

Value Proposition

Some say the best quality and investment grade properties are in the hands of the largest real estate developers, who are mostly well-financed and may not wish to part with their portfolios. Admittedly this is true. However, in recent times as banks have begun to limit or restrict their real estate development loans, we have noticed a trend where some developers are disposing of some of their currently held prime real estate in order to capture opportunities elsewhere, by selling to a REIT to liquidate their assets. In addition to arranging outright sales, Pacific Investors, Ltd. has arranged several “sale – lease” back transactions, where the seller gets cash, but also retains the use of the property via a lease arrangement.

FPFIG is optimistic of REITs as an investment, because as Western and Asian population lives longer, these “baby-boomers” will tend to look for relatively steady investments, such as a REIT, that buys established properties with good rental yields. Compared to bank savings and bonds, REIT offer some potential of capital appreciation, in addition to the rental income, thus kind of falling between a bond and a real estate stock, which earning distribution may be subject to the board, while a REIT must distribute most earnings, as mentioned above, to keep its tax-free status.

A REIT also gives the many middle class investors an opportunity to invest in real estate in China cities, yet may not wish to spend large amounts on direct ownership nor want the trouble of managing and maintaining the property.

Key elements in evaluating a REIT

Management:

As with any business, a key to successful performance lies with the expertise of management. However difficult for the individual investor, a couple of indicators used to assess a REITs value are its management's amount of experience as well as the length of time the management team has worked together. If a REIT has recently booked a new source of funds, it can be inferred that the institution providing the capital feels comfortable with the strengths and strategies of the REIT's management.

Capital Sources:

Because REITs are, by definition, obligated to distribute 90% of their taxable income to investors, they must rely upon external funding as their key source of capital. Investors must consider a REITs potential for future success, assessing whether individual REITs have the access to debt or equity capital sufficient to fund their future growth plans. REITs that have the ability to properly leverage themselves usually will deliver superior returns.

Earnings:

Net income under generally accepted accounting principals assumes that the value of assets diminishes predictably over time. However, real estate values tend to rise and fall with current market conditions. Funds From Operations (FFO) was adopted to address the problems with valuation and performance by excluding historical depreciation costs from the net income figure.

FFO has become the industry wide performance standard for REIT operating performance, but other factors should be considered when evaluating a REIT's overall performance. For instance, if a REIT has a portfolio which includes older properties, its higher capital expenditure needs make its FFO value misleading to investors. Many professional REIT investors calculate cash flow after capital items (known as Cash Available for Distribution or CAD) as another measure of a REIT's performance. In addition, investors must also be familiar with the REIT dividend payout ratio as a measure of sustainability of dividends.

In general, REITs and their performance have some common characteristics with small-cap stocks and bond-like investments. The market capitalization of the average REIT on the Wilshire Real Estate Securities Index is $340 million. REITs comprise 6% of the small-cap index, the Russell 2000. However, REITs have advantages over stocks and bonds in terms of dividends: between 1995 and 2000, the average dividend yield on REITs (7.3%) is six times that of the Russell 2000 average dividend. Furthermore, all REITs pay dividends, whereas less than half of the Russell 2000 stocks pay dividends.

The long term performance of an individual REIT is determined by the value of its real estate assets at any given time. One of the primary incentives for REIT investment is the low correlation of its value to that of other financial assets. Because of this, REITs possess low relative historical volatility and provide some degree of inflation protection. In addition to the advantages of an investment which avoids double taxation and requires no minimum investment, REITs offer investors current income that is usually stable and often provides an attractive return. Another factor attractive to the investor is that a REIT's performance is monitored on a regular basis, by independent directors of the REIT, analysts, auditors, and the business and financial media.