Weigh the pros and cons of holding real estate via listed securities rather than private vehicles
The idea
Holding property through listed securities trades control for convenience. Compared with direct ownership, shares are liquid and priced daily, the minimum investment is small, liability is limited, investors reach large, high-quality buildings and professional management, a qualifying REIT avoids corporate tax on income it distributes, and one share spreads exposure over many properties. Against that, share prices move with the stock market and look far more volatile than appraised values, investors cannot control property decisions, a listed structure has its own costs, REITs cannot pass tax losses through to shareholders, distribution rules limit retained earnings so growth needs fresh capital, and structures such as UPREITs can create conflicts of interest. The trap is comparing REIT volatility with smoothed appraisal-based private returns.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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- Discuss the kinds of real estate securities that trade publicly
- Argue why NAVPS, the net asset value per share, suits the valuation of listed real estate securities, and use forecast cash net operating income to estimate it
- Explain the role of FFO (funds from operations) and AFFO (adjusted FFO) in valuing REITs
- Value a REIT share by discounted cash flow, by net asset value and by relative value using price-to-FFO and price-to-AFFO multiples, and interpret the results