Investing the REIT way

Updated: Aug 31, 2020

A legislation signed by U.S. President Dwight D. Eisenhower in 1960 has, today, become a sought-after investment option for markets across the globe. This legislation by the Congress created a new approach to income-producing real estate investment – a way in which the best of both, real estate and stock-based investments, are combined. 

REITs, brought the advantages of commercial real estate investment, for the first time, to all investors – advantages that had previously been available only to large financial investors and wealthy individuals. This investment approach allowed investors around the world to gain access to income-producing real estate portfolios. REITs or Real Estate Investment Trusts provide people with the means to earn income generated by commercial real estate ownership, without actually going through the hassle of buying commercial real estate. These real estate or related assets may include properties like office buildings, hotels, shopping malls, warehouses and more. 

REITs mainly follow a typical and straightforward business model whereby the REIT leases space and collects rent on its real estate. The income generated by leasing is then paid out to the shareholders as dividends.

Source: Nareit

Even though the U.S. remains the largest market for listed real estate, the market is rapidly increasing across the globe. Currently, the REIT approach of real estate investment has been adopted in nearly 40 countries, including all the G7 nations. The share of REITs in the overall real estate investments is highly significant, with REITs constituting 75.2% of the market capitalisation in the FTSE EPRA/Nareit global universe. Globally, the total market capitalisation for REITs stands at about USD 1.7 trillion. 15 of the 30 largest real estate companies around the world are REITs, with the U.S. contributing 13 to that list. The U.S. REIT’s constitute 96% of the total market capitalisation of the real estate sector. In other countries, such as Singapore and Malaysia, where REIT’s have been introduced over the past two decades, they account for 55% and 51% of the total real estate market capitalisation respectively.

REITs not only provide investors from different walks of life the access to income-producing real estate but also have a list of other benefits for investors around the world. Some of the major benefits include:

  • Liquidity: With shares of publicly listed REITs readily traded on major stock exchanges, investors are provided with the benefits of real estate investment along with the ease of buying or selling stocks like any other ETFs or mutual funds. 

  • Portfolio Diversification: REITs offer advantages with low correlation with other stocks and bonds. Providing benefits typically not found across other industries, REITs provide an investment in real and tangible assets.

  • Transparency: With the presence of independent directors, analysts and auditors, the corporate governance structure of REITs is such that it is aligned with the interests of its shareholders.

  • Competitive Dividends Yields: REITs are required to distribute at least 90% of their taxable income, in the form of dividends, to their shareholders annually. With a higher average than other equities, REITs play as an important investment not just for financial and retail investors but also for retirement savers and retirees who require a constant stream of income to adjust for their expenses.

  • Strong Market Performance: REITs have historically provided returns higher than corporate bonds. Over the past 25 years, REITs have also provided total returns above the S&P 500.

Having an array of attractive benefits, a REIT also has its cons. REITs have to distribute a massive chunk of their earnings to the shareholders as dividends which poses a challenge for the growth of a REIT. REITs mainly depend on rental yields as a core determinant for their earnings, with rental yields not always being attractive. Nonetheless, REITs have verifiably created a history of strong performance by providing competitive total returns and long-term capital appreciation. The industry's stable track record has in turn brought about a more widespread acceptance among institutional investors, financial advisors and retail investors. 

Overall, REITs are a significant part of the economy, investors' portfolio and domestic communities. Taken exclusively, a solitary REIT-claimed property can change the whole composition of an area. On the other hand, when seen as a whole industry, REITs essentially add to the tax base, job market and local community.

By Adwait Khandelwal - BSc Management Student at University of Nottingham

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