REITS – Real Estate investment trusts

reit

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REITS

This is a type of investment security that focuses on investing in real estate. A REIT typically operates like an investment trust. REITS is comparable to a mutual fund which enables small and large investors to acquire ownership in real estate ventures. REITS are often traded on major exchanges just like shares.

REIT companies like Ventas invest in commercial real estate like offices, apartment buildings, warehouses and hospitals, but they also invest in residential homes.

Why should you invest in REIT?

Interestingly, by Law REITS are required to pay out at least 90% of the dividend payout to shareholders.

Diversification: Risk is reduced when you invest in REITS. Different REIT focuses on different properties in the commercial and residential real estate. When a specific market is slacking, others may be doing well, so the risk is reduced since the loss can balance out with your gains.

Tax: REITS are exempt from corporation tax. Instead you pay income tax on your returns.

Access to the property market: By investing in REITS, you can participate in the property market and benefit from the advantages, but you don’t need to spend so much or go through the hustle with getting an actual property. All of the work is done by the REIT company.

Liquidity: REITS are traded on the stock exchanges. So buying and selling is very easy. Just imagine if you had to sell an actual property? That would take time to get the cash.

As an investor, you have no business maintaining the property.

Types of REITS

  1. Equity REITS: most of what have been explained above best describes an equity REIT. Equity REITs own and invest in properties. REIT companies get their revenue from leasing, and this revenue is then distributed to the shareholders as dividends. Examples of REITS include Ventas (trading as –VTR), Simon property group (SPG).
  2. Mortgage REIT: The REIT companies invest in property mortgages and own property mortgages. They loan money to real estate owners or they buy already existing mortgages or mortgage-backed securities. A mortgage-backed security is a type of asset-backed security that is secured by a mortgage or a collection of mortgages. These mortgages are packaged into securities and sold to investors. Revenue is made through interest earned either directly from mortgage or from mortgage-backed securities.
  3. Hybrid REIT: A hybrid REIT is one which combines both equity and mortgage REIT. In other words, income is generated from rents and capital gains. It also receives interest like a mortgage REIT. Example is the Vanguard REIT ETF (VNQ).

 My Opinion

I think investing in REITs is a good investment, especially in a stable economy. Certainly not in a period of financial crisis, as that investment will suffer loss. However, you can buy cheap if you enter at the right time so that when the economy stabilizes you can make a good profit. It really depends on how much risk you are willing to take. What is your risk preference?

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LIBOR RATE

LIBOR Rate

The London interbank offered rate (LIBOR) represents the average of the interest rates charged by the leading banks in London. The LIBOR is considered to be an important interest rate in finance. The LIBOR is the most widely used benchmark for short term interest rate. The primary function is to serve as a reference point for debt instruments such as government bonds, corporate bonds, mortgages, loans, credit cards etc. The LIBOR is the average interest rate that banks can borrow from each other. The LIBOR rate is not just for the banks in London. It is called the London interbank offered rate because the benchmark is set in London. The calculations are performed by Thomas Reuters.

How is the rate calculated?

The LIBOR is based on 5 currencies namely: US dollars (USD), EURO (EUR), Sterling (GBP), Japanese Yen (YPN), and Swiss Franc (CHF). Also, there are 7 different maturities: the overnight, one week, and 1,2,3,6 and 12 months making a total of 35 different LIBOR rate each business day. A selection of panel banks for top banks such as: CITI group, JP Morgan Chase, Bank of America, Barclays, UBS and others estimate the amount of interest they are willing to borrow another bank in the short term. The process is overseen by the ICE benchmark Administration (IBA) and calculated by Thomas Reuters.

Why is LIBOR so important?

Benchmark: As mentioned, the LIBOR is very important as it sets the base rate for short-term interest rates

Economic evaluation: the LIBOR rate helps to evaluate the current state of the worlds banking system. The financial institutions are very important when considering the health of the economy. So that’s why investors keep a close eye on the LIBOR rates.

Central bank interest rate: professional analyst monitor the LIBOR rate as it guides them or sets an expectation for future central bank interest rate changes.

The LIBOR Scandal

The scandal was made known in 2008 during the financial crisis. Financial institutions have been accused of fixing the LIBOR. Being an important indicator of the interest rate and used by so many institutions, bankers from various financial institutions that provide the interest rate were accused of understating the interest rate to artificially keep the LIBOR rate low. The effect on the economy at the time was that, since it’s an indicator of the health of the banks, during the 2007-2008 financial crisis, some banks appeared stronger than they actually were.

My Opinion

As an investor it’s important to constantly look at the graphs  plotted on the LIBOR rates as this can give you a sense of how and when to invest over a period of time. Investment banks use it and its available to individuals as well. Happy investing!!!!

Oil Prices

oil

financialtribune.com

The downturn in the oil industry has been in the top list of the most discussed topics. The downturn in oil price is not just bad news, but its good news too. Consumers are able to save a few bucks in their pocket because of the low prices. However, the story is different for the oil producers. Whether its the companies or countries that depend on exporting crude oil. The cost of a barrel of oil has fallen about 70 percent since 2014.2016 has seen the lowest price drop since 2003. Oil prices have been in the range of $70 – $100 a barrel but in 2016 the price went as low as $27 a barrel. The low prices have caused loss of jobs, a halt in exploration and production, bankruptcy etc. A few factors have contributed to the drop in prices.

Why the drop in oil Prices?

Increase in oil production

Overtime the US has almost doubled their production which has kicked out countries that were once exporting oil to the US. This means countries like Saudi, Algeria and Nigeria are forced to sell to other countries. Canada, Iraq, and Russia have also increased production.

Iran sanction Lift

Mid January 2016, the Iran sanction was lifted after the United Nations nuclear agency declared Tehran fulfilled the commitment to scale back its nuclear program.

Technology advanced cars

The demand for fuel is lagging behind because vehicles are becoming more energy efficient. This doesn’t have as much effect as the other points mentioned. However, it’s a factor to consider in the future.

Going forward

Russians and Saudis have agreed to freeze production. Major producing countries will meet on the 17th of April in Qatar, to discuss a possible price freeze to stabilize the price. Some analysts say we might see a possible increase in oil price. At the moment, global oil supply is at 95.4m Barrels per day vs. a demand of 93.9m barrels estimated. So it’s a 1.5m barrels per day over supplied. According to Mike Kelley from the seaport global securities, he sees a balanced demand and supply in 2017.

Who is affected?

Oil producers have been hit really badly during this downturn and also companies that support energy sectors have seen their share prices drop. The oil industry can be grouped into the upstream companies and downstream companies and the integrated companies. The upstream companies have been affected the most because they are involved with exploration and production of crude oil. On the flip side, downstream companies deal with refining and distribution. Since the price at which the upstream companies sell is regulated by the market they are hit the hardest, and most of their cost of production are fixed. However, most large oil companies are integrated companies meaning that they have both upstream and downstream operations. These companies have experienced a hit due to their upstream operations. Companies such as Exxon, Chevron and BP are integrated oil companies. Until an agreement is made on regulating production of crude oil, the prices are likely to remain low.