Real Estate Investment Trust (REIT)

What are REITs?

REITs or real estate investment trust can be described as a company that owns and operates real estates to generate income. Real estate investment trust companies are corporations that manage the portfolios of high-value real estate properties and mortgages. For instance, they lease properties and collect rent thereon. The rent thus collected is later distributed among shareholders as income and dividends.

Typically, REITs offer investors an opportunity to possess high-priced real estate and enable them to earn dividend income to boost their capital eventually. This way, investors can utilise the opportunity to appreciate their capital and generate income at the same time.

Both big and small investors can park their funds into this investment option and reap benefits accordingly. Small investors may attempt to pool their resources along with other investors and invest the same into large commercial real estate projects. Properties included in REITs comprise data centres, infrastructure, healthcare units, apartment complexes, etc.

How Does a Company Qualify as a REIT?

To qualify as a REIT, a company has to meet specific requirements as mentioned below.

A company qualifies as a Real Estate Investment Trust (REIT) if it meets a number of requirements, including: 

Investment: At least 75% of a REIT's assets must be invested in real estate or cash. 

Income: At least 75% of a REIT's gross income must come from real estate sales, rents, or interest on mortgages. 

Dividends: A REIT must pay at least 90% of its taxable income to shareholders in the form of dividends each year. 

Structure: A REIT must be a taxable corporation or business trust with a board of directors or trustees. 

Shareholders: A REIT must have at least 100 shareholders after its first year, and no more than 50% of its shares can be owned by five or fewer people. 

Transferability: A REIT's shares must be fully transferable. 

REITs are companies that own, finance, or operate income-producing real estate. They allow people to invest in real estate through company stock, mutual funds, or exchange traded funds (ETFs). 

Types of Real Estate Investment Trust (REIT)

In a broader sense, the types of business REITs are involved with tend to help classify them better. Also, the methods devised to sell and purchase shares further help classify REITs.

The following is a list of the different types of REITs.

Equity:

This type of REIT is among the most popular ones. Typically, it is concerned with operating and managing income-generating commercial properties. Notably, the common source of income here is rents.

Mortgages: 

Also known as mREITs, it is mostly involved with lending money to proprietors and extending mortgage facilities. Further, REITs tend to acquire mortgage-backed securities. Mortgage REITs also generate income in the form of interest accrued on the money they lend to proprietors.

Hybrid:

This option allows investors to diversify their portfolio by parking their funds in both mortgage REITs and equity REITs. Hence, both rent and interest are the sources of income for this particular kind of REIT.

Private REITS:

These trusts function as private placements, which cater to only a selective list of investors. Typically, private REITs are not traded on National Securities Exchanges and are not registered with the SEBI.

Publicly Traded REITS:

Typically, publicly-traded real estate investment trusts extend shares that are enlisted on the National Securities Exchange and are regulated by SEBI. Individual investors can sell and purchase such shares through the NSE.

Publicly Non-Traded REITS:

These are non-listed REITs which are registered with the SEBI. However, they are not traded on the National Stock Exchange. Also, when pitted against public non-traded REITs, these options are less liquid. Plus, they are more stable as they are not subjected to market fluctuations.

Advantages of REITs.

Investors who park their funds in a REIT can benefit in these following ways.  

REITs deliver diversification for your portfolio, potentially generate steady income through dividends, and give you exposure to a range of properties. REITs can also serve as a hedge against inflation and have historically delivered competitive long-term returns.

There are many benefits to buying Real estate investment trust. Chief among them are:

Diversification

REITs own a multi-property portfolio having branched-out tenant pools and this lessens the risk of relying on a single property or tenant. For instance, if you own a station and it somehow closes down, its value would probably depreciate. The magnitude of such stand-alone risk is minimized once investment is done in a pool of properties via REITs. This is turn encourages the generally accepted business notion of investing in different types of assets.

Affordability

The investor of REITs enjoys the benefit of being a part of pool of capital, acquiring interests over much larger opportunities as compared to what he would achieve at his personal capital alone. For instance, it may not be available for an individual investor to afford a direct investment into a giant asset such as shopping malls or plazas. However, he/she can get to invest in it via REITS in small chunks.

Liquidity

Investment via Real estate investment trust offers the added benefit of liquidity – the comfort of converting assets into cash. Unlike shares, it is easy to purchase and sell real estate investment. If the price of the REITs you invested in goes up by next day, you can login to your brokerage account and take care of your position in an instant.

High Yield

During periods of dynamic economic activity, the appreciation in value of real estate is reflected in REIT stocks. For most investors, the major attraction of REITs has been the capital to compound in the shape of dividends in the REITs structure.

Transparency & Flexibility

The whole process of purchasing and selling a REIT is clear and flexible. REIT investors can easily get access to information concerning REIT prices and get involved in trading throughout the day.

Who Should Invest in REITs?

Since REITs own and manage high-value real estate properties, they are one of the most expensive avenues of investments. Consequently, investors who park their funds in REITs are those who have substantial capital at their disposal. For example, big institutional investors like insurance companies, endowments, bank trust departments, pension funds, etc. can suitably invest in these financial tools.

Role of REITs in a Retirement Portfolio

Including REITs in one’s retirement portfolio tends to prove beneficial for investments in several ways. The following pointers help gain valuable insight into the same.

Exposes portfolio to a diverse mix of properties

By including real estate, one can diversify his/her asset classes significantly and does not require managing them personally. Additionally, with diversification, price fluctuation of other investment options would not have an impact on REITs. Rather, it can be said that in a falling market, the value of REITs does not drop as fast as stocks.

Opportunity to generate earnings

When the value of REIT appreciates, investors tend to earn substantial returns. Also, these companies are required to distribute as much as 90% of their taxable earnings to their shareholders, serving as an avenue to generate steady income.

Suitable for the long run

Unlike stocks and bonds which follow a business cycle of 6 years, REITs are more in sync with the movement of the real estate market. Notably, such movement tends to last for over a decade and hence further suitable for investors who are looking for a long-term investment horizon. In turn, it proves to be a profitable investment avenue for retirement planning.

Helps hedge inflation

As per research, REITs enables investors to hedge the effects of inflation in the long run. For instance, by staying invested for a term of 5 years, investors can protect their funds from inflationary effects more effectively as compared to stock options.

How to Invest in Real Estate Investment Trusts?

Like popular public stock, investors may decide to buy shares in a particular REIT that is enlisted on the major stock exchanges. They may do so in the following three ways.

Notably, REIT as an investment option tends to resemble mutual funds, the only difference being that REIT holds properties instead of bonds or stock options. Additionally, REIT investors are entitled to avail the assistance of financial advisors to make more informed decisions in terms of investing in an appropriate REIT option.

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