Debunking Myths About REITs | Real Estate Investment Trust (2024)

Before the pandemic caused by the novel coronavirus, REITs (Real Estate Investment Trusts) were the best-performing long-term asset class*.

However, in the shadow of the recent crisis investors can think about the short and medium term effects on their investments in this sector, through the fundOTP Real Estate & Construction.

Debunking Myths About REITs | Real Estate Investment Trust (1)

*Evolution of asset classes 1985-2018

I would like to write to you today about the strategy applied in the case of this fund. But to get there we first need to explain what a REIT is.

REITs are specialized companies that own or finance real estate in a very wide range of sectors. These companies must meet a number of conditions to qualify as REITs (have a minimum of 100 shareholders, distribute a minimum of 90% of profits as dividends) and are generally listed on major stock exchanges, offering a number of benefits to investors their.

These REITs first appeared in the US and are currently owned by more than 87 million Americans, either through mutual funds or through their 401K, their private retirement plan.

According to NAREIT (National Association of Real Estate Investment Trusts), REITs are divided into the following sectors:

  • Offices (office spaces, from skyscrapers to suburban areas)
  • Industrial (industrial premises such as warehouses and distribution centers)
  • Retail (retail spaces, malls, outlets, shopping centers)
  • Hospitality (hotels and other premises that are rented out to travelers)
  • Residential (various residential premises that are rented out to tenants)
  • Timber (specializing in the management, production and sale of timber)
  • Health (hospitals and clinics and collects rent from tenants. Includes nursing homes)
  • Storage (rents storage space and collects rent)
  • Infrastructure (infrastructure real estate and collects rent from tenants occupying those spaces)
  • Data-centers (spaces and equipment that allow customers to securely store their data. Includes servers, uninterruptible power supplies, monitored temperature and physical security.)
  • Diversified (own and manage a mix of properties and collect rents. For example, they also own industrial and residential premises)
  • Specialized (own a unique mix of properties and collect rents. For example, cinemas, casinos, arable land, outdoor advertising spaces)

As you can see above, not all REITs are the same. While some are more affected by COVID-19, others have crossed this period without problems (data-centers-industrial and infrastructure, for example).

It should also be noted that OTP Real Estate & Construction is an actively managed diversified fund, which means that the portfolio manager may temporarily deviate from a standard portfolio as it identifies certain opportunities.

Which is what happened in the crisis caused by COVID-19, when exposure to REITs was reduced and exposure to fixed income instruments increased. Thus, the steep correction experienced by certain REITs was avoided, with the volatility of OTP Real Estate & Construction significantly lower than that of the REIT indices during that period.

Later, after the "beneficiaries" of the current times were identified, exposure was resumed on companies that we believe will perform well in the future.

On July 31, the portfolio structure was as follows:

Debunking Myths About REITs | Real Estate Investment Trust (2) Debunking Myths About REITs | Real Estate Investment Trust (3)

The result is therefore a highly diversified portfolio, particularly inclined towards specialized REITs, the winners of the current situation, but also those that continue to benefit from "wind in the sails".

In addition, the fund distributes quarterly dividends to investors, dividends that sum the coupons and dividends received during that quarter. The fund distributed cumulative dividends in 2019 of 26.06 RON/fund unit. In the first quarter of 2020, it distributed a dividend of 9.08 RON/fund unit, and in the second a dividend of 8.63 RON/fund unit and 1.79 EUR/fund unit for the Euro class.

And since we're here, the fund is now also available in Euros, and investors with a preference for this currency can now subscribe to OTP Real Estate & Construction in Euros as well.

Dividing the last dividend granted by the most recent VUAN we obtain a yield of 1.71%, respectively an annualized yield of approximately 7% in Euros. We have to admit that this yield is difficult to achieve these days for the European currency, and that it is higher than the average yield obtained in our real estate market.

We therefore believe that the current context is one that favors certain sectors over others, which creates interesting investment opportunities for active managers. They can use their experience and expertise to navigate these troubled waters and create added value for their investors.

Last but not least, we must remember that we are talking about high-quality physical assets in the case of REITs, which generally have long-term contracts in place, attractive cash-flows and offer attractive investment opportunities as savings exit from the current crisis.

Adrian Anghel, Deputy CEO


This article is purely informative and represents the personal views of the author. The article does not represent an investment recommendation from OTP Asset Management Romania SAI S.A. or a firm offer to contract the financial products it refers to. Also, the article does not constitute personalized financial investment advice or tax/legal advice. OTP Asset Management Romania SAI S.A. is not responsible for potential losses resulting from transactions conducted in accordance with the ideas expressed in this article. Although the information presented has been carefully verified, OTP Asset Management Romania SAI S.A. is not responsible for the information presented in this document, which may be changed without any prior notice. Please note that the value of your investment may increase or decrease over time, and past performance is no guarantee of future performance. Retrieving information from this article is not permitted

As someone deeply immersed in the world of real estate investments, particularly in the context of the recent challenges posed by the COVID-19 pandemic, I can provide valuable insights into the dynamics of Real Estate Investment Trusts (REITs) and the strategies employed by funds such as OTP Real Estate & Construction.

Firstly, the evidence supporting the significance of REITs as a resilient and high-performing asset class is apparent in their historical performance. Before the pandemic, REITs stood out as the most successful long-term asset class, as demonstrated by their track record from 1985 to 2018. Despite the recent crisis, understanding the short and medium-term effects on investments in this sector is crucial.

OTP Real Estate & Construction, as a fund, has adapted its strategy proactively during the pandemic. This adaptation involves a shift in exposure from REITs to fixed-income instruments, successfully mitigating the abrupt corrections experienced by some REITs. The fund's lower volatility during this period showcases the effectiveness of this approach, providing a more stable investment environment.

Now, let's delve into the core concept: What are REITs? Real Estate Investment Trusts are specialized companies that own or finance real estate across a broad spectrum of sectors. To qualify as REITs, these companies must meet specific conditions, such as having a minimum of 100 shareholders and distributing at least 90% of profits as dividends. They are typically listed on major stock exchanges, offering various benefits to their investors.

The National Association of Real Estate Investment Trusts (NAREIT) categorizes REITs into sectors such as offices, industrial spaces, retail spaces, hospitality, residential properties, timberland, healthcare, storage, infrastructure, data centers, diversified, and specialized. Each sector has its unique characteristics, and their performance during the pandemic has varied significantly.

OTP Real Estate & Construction, being an actively managed diversified fund, had the flexibility to deviate temporarily from a standard portfolio during the pandemic. This allowed the fund to identify opportunities and strategically reduce exposure to REITs while increasing investments in fixed-income instruments.

As of July 31, the fund's portfolio exhibited a robust diversification, particularly favoring specialized REITs that thrived in the current circ*mstances. The quarterly distribution of dividends, totaling 26.06 RON per unit in 2019 and continuing in 2020, adds an attractive income component for investors.

Furthermore, the fund is now available in Euro, offering investors the option to subscribe in their preferred currency. The last dividend distributed, when compared to the latest Net Asset Value per unit, translates to a yield of approximately 1.71%, or an annualized yield of around 7% in Euro. This yield, especially in the current economic climate, surpasses the average returns in the real estate market.

In conclusion, the present context presents unique investment opportunities within specific sectors, and active fund managers, armed with experience and expertise, can navigate these turbulent waters to create added value for investors. It's essential to emphasize that REITs represent high-quality physical assets with long-term contracts, attractive cash flows, and investment opportunities as economies recover from the current crisis.

Adrian Anghel, Deputy CEO, emphasizes the informative nature of this article, providing personal opinions rather than investment recommendations. Readers are reminded of the inherent risks in investments, and past performance does not guarantee future results. The article does not serve as personalized financial or legal advice, and readers are urged to exercise caution in their financial decisions.

Debunking Myths About REITs | Real Estate Investment Trust (2024)


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