At some point last year (around the time that I was writing the blog series on Unit Trusts), I met someone from the property industry who told me in no uncertain terms that REITs were the place to invest my money because they were the best performing asset class.

And it was quite true at the time – REITs (Real Estate Investment Trusts) were the place to have had your money up to that point (I went and checked).

But because I’m contrarian by nature (and easily offended by no uncertain terms), I pointed out that it would make no sense to invest in listed property (which is what REITs are) if their performance had already been stellar. Because, well, why would you buy something that’s expensive when you could buy other things that are (relatively) cheap?

Of course, that argument was a bit spurious – because I had no idea whether REITs were expensive or not. But my general rule of thumb: if a layperson tells me to invest in something, it’s probably a good time to sell it.

I realise that sounds a bit arrogant, but here is the economic reasoning:

  1. If something is a good deal, then we’re saying that there is a mismatch between value and price. Specifically: that the price is lower than the value.
  2. How does that happen?
  3. Usually when the demand is not there to bump the price upwards toward value.
  4. As more people become aware of this “deal”, general demand picks up for the underpriced asset, and prices start to rise.
  5. That is: the price correction towards value is driven by the flow of information.
  6. Here is a summary of the information flow:
    1. First on the scene are in-the-know industry insiders.
    2. Second on the scene are people in the industry who are watching what the industry insiders are doing.
    3. Third on the scene are the industry observers.
    4. Then comes the media.
    5. Then comes the general public.
    6. At this point, in all likelihood, the in-the-know industry insiders are starting to cash out before the wave of public opinion turns against them (don’t forget, if the public starts to buy into these assets, then someone is selling them).
    7. At this point, the market is likely to become overvalued, risking a price correction in the other direction (ie. the proverbial bubble burst)

So What Happened To REITs Last Year?

Listed Property people love to show you this graph:


But really, they should also show you this graph:


And specifically, you should look at what happened in 2013 and 2014 on the right there…

According to the SA REIT Association, the results from 2013:

  • Listed Properties gave you a 7.1% return (and we should note here that an 8.1% was made in the first quarter, after which the market stagnated and shrank).
  • The Bond Market yielded 0.6% (pathetic).
  • The Equities Market provided a 21.4% return.

And actually, let’s look at the 2014 year-to-date (up to the end of July):

  • Listed Properties – 8.2%
  • Equities – 12.8%
  • Bonds – 4.4%

So the market in listed properties tanked a bit. And I guess I should point out that listed properties fell by 7.1% in the first three months of 2014. There’s been a correction since.

What I’m saying: it’s not that listed properties are a bad investment – but I recommend skepticism when there are too many people talking about a great deal.

Tomorrow/Thursday: what exactly is a REIT, where does it get its value from, why it’s a great investment (in some ways), and some thoughts on whether or not a particular REIT is going cheap…

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at