Real estate trusts: Are they right for you?

If you once invested at the Nairobi Stock Exchange, chances are that you made excellent returns over a short period of time.

Sadly though, you stand the risk of exposure to an array of factors characterised by a lack of a diversified portfolio.

If you have considered diversifying your investment portfolio but didn’t know which one to go for, then Real Estate Investment Trusts may be an option to consider. But again, you may ask; are they really right for me?

Simply put, a REIT is a pool of funds that is invested in real estate.

Funds are drawn from investors and put under the management of a fund manager who then decides on the kind of real estate investments to go for based on the amount raised by subscribers for the trust. REITs will typically invest in real estate or related assets.

These can vary from shopping centres to office buildings, hotels and mortgages secured by real estate.

There are three types of REITs but the most common one is an equity REIT.

The REIT basically entails having investors’ pool funds by way of buying shares of the investment vehicle and getting an income out of it.

This income is mostly paid on an annual basis.

The other type, a mortgage REIT basically entails lending money to owners and developers or investing the money in financial instruments secured by mortgage or real estate.

A hybrid REIT combines both the features of a mortgage REIT and the equity REIT.

An investor in this category has his portfolio well diversified against the downturns in each category.

In Africa, REITs are also gaining popularity in some nations where financial markets are well developed.

Key in Africa is South Africa which was the top performer in the world in terms of total return over three year period giving a hefty 34 per cent.

The number of public REITs in South Africa was seven by the end of 2006.