Real Estate Investnment Trust

A REIT offers you investment options in real estate through property or mortgages. It often trades on major stock exchange platforms. REITs provide investors a useful liquid stake in real estate, also receiving special tax considerations and usually offer high dividend yields.

It is an investment method that is similar to a mutual fund, allowing all types of investors to acquire ownership in real estate ventures. In some cases it can also manage commercial properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels and shopping malls.

All REITs are required to have at least a 100 shareholders, with no five holding more than 50% of the shares between them. Furthermore at least 75% of the assets must be invested in real estate, cash or U.S. Treasuries and 75% of the gross income must be derived from real estate.

They’ve existed for more than 50 years in the U.S. Congress and were granted legal authority to be formed in 1960 as an amendment to the Cigar Excise Tax Extension. The National Association of Real Estate Investment Trusts (NAREIT),was founded.

In 1969 the first European REIT legislation was passed in The Netherlands.

In 1971 the first listed property trusts was launch in Australia.Canadian REITs debut in 1993. The first Asian REIT was the Japanese launch in 2001.

European legislation boosted their popularity in France (2003), Germany (2007) and the U.K. (2007), up to date about 40 European countries now have REIT legislation.

In the United States there are three kinds of REITs:

1. Equity REITs Invest in and own properties, responsible for the equity or value of real estate assets. The revenue mainly comes from leasing spaceto tenants. Rent is then distributed as dividends to the shareholders. They may also sell property holdings, in which case the capital appreciation is reflected in dividends. 2. Mortgage REITs Invest in and own property mortgages, money loaning for mortgages to real estate owners or can purchase existing mortgages and mortgage-backed securities. Thee arnings are generated mainly from the net interest margin, it is spread between the interest earned on mortgage loans and the cost of funding the loans. Potentially sensitive to interest rate increases.

3. Hybrid REITs Individuals can invest in both properties and mortgages, by either purchasing shares directly on an open exchange or investing in a mutual fund that specializes in public real estate. Some REITs invest specifically in one area of real estate or in one specific region, state or country, while others are more differentiated. Several REIT ETFs are available, with mostly fairly low expense ratios. The ETF (Exchange Traded Fund) format help investors avoid being over-dependent on one company, geographical area or industry.

REITs provide a viable liquid and non-capital intensive method to invest in real estate. Many REIT funds have dividend yields of more than 10%. They are also mostly different from traditional stocks and bonds, capable of providing a measure of diversification.

Further Reading

  • Real estate investment trusts: A review of the financial economics literature – [PDF]
  • The transmission of shocks across real estate investment trust (REIT) markets – [PDF]
  • Risk and return in real estate – [PDF]
  • An investigation of the change in real estate investment trust betas – [PDF]
  • The fractal structure of real estate investment trust returns: The search for evidence of market segmentation and nonlinear dependency – [PDF]
  • Real estate returns and the macroeconomy: some empirical evidence from real estate investment trust data, 1972-1991 – [PDF]
  • Conditional volatility of equity real estate investment trust returns: a pre-and post-1993 comparison – [PDF]
  • Financing choice and liability structure of real estate investment trusts – [PDF]
  • Hotel real estate investment trusts' risk features and beta determinants – [PDF]
  • The time-varying nature of the link between REIT, real estate and financial asset returns – [PDF]