The basics of REITs

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What is a REIT?

A Real Estate Investment Trust (REIT) is a company that owns, and in most cases, manages income-producing commercial real estate such as offices, apartments, warehouses, hospitals, malls, hotels and in some instances, even timberlands. REIT shares are traded on major stock exchanges, including London, New York, and Sydney.

 

REITs were created by the US Congress in the 1960s to give average investors access to investments in large-scale, commercial properties through the purchase of equity.

 

A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs remit up to 100 percent of their taxable income to their shareholders, who then pay taxes on the dividends received as well as any capital gains. As with other business, excluding partnerships, a REIT cannot pass any tax losses through to its investors.

Why were REITs created?

US Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to average investors. Congress decided that a way for average investors to invest in large-scale commercial properties was the same way they invest in other industries — through the purchase of equity.

In the same way shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through commercial real estate ownership. REITs offer distinct advantages for investors: portfolio diversification, strong and reliable dividends, liquidity, solid long-term performance and transparency.

What qualifies a company as a REIT?

To qualify for a REIT, a company has to:

  • Distribute at least 90% of the company’s taxable income to its investors.
  • Have no more than 50% of shares held by less than five shareholders during the last half of each taxable year.
  • Have at least 75% of assets allocated to real estate.
  • Have at least 75% of gross income from rents or mortgages.
  • Have no more than 25% invested in taxable REIT subsidiaries.
How many types of REITs are there?

There are three types of REITs, namely equity, mortgage and hybrid REITs.

Equity REITs mostly own and manage income-producing properties and operate them as part of their own portfolio. They engage in a number of real estate activities, including leasing, maintenance and development of real property and tenant services. Their revenues come principally from rentals generated by their properties.

Mortgage REITs loan money for mortgages to real estate owners, or buy existing mortgages or mortgage-backed securities. They generate revenues through the interest earned on mortgage loans and for the most part, extend mortgage credit on existing properties only.

Hybrid REITs as the name suggests, are a combination of both equity and mortgage REITs and invest in both properties and mortgages.

What are the benefits of REITs?

REITs offer investors the following significant benefits:

  • Competitive long-term rates of return
  • Significantly higher dividends on average than other equities
  • Liquidity – REITs are traded on the major stock exchanges
  • Monitoring by independent directors, analysts and auditors, and the business and financial media
  • Management by skilled real estate experts
  • Portfolio diversification
  • Regulation
How many REIT sectors exist?

There are currently 23 US REIT sectors. Most REITs specialise in a single property sector, with diversified REITs investing in more than one. While some invest nationally or globally, others specialise in just one region.

US REIT Sectors

  • Regional Malls
  • Shopping Centres
  • Free Standing Malls
  • Office
  • Industrial
  • Logistics
  • Healthcare
  • Lodging/Hotels
  • Student Accommodation
  • Net Lease
  • Data Centres
  • Self-storage
  • Infrastructure
  • Timber
  • Towers
  • Diversified
  • Single-Family
  • Multi-Family
  • Manufactured Homes
  • Farmland
  • Prison
  • Gaming/Casino
What types of properties do REITs own and manage?

REITs own and manage a variety of property types: shopping centers, health care facilities, apartments, warehouses, office buildings, hotels and others. Most REITs specialise in one property type only, such as shopping malls, timberlands, data centers or self-storage facilities.

Some REITs invest throughout the country or in some cases, throughout the world. Others specialise in one region only, or even in a single metropolitan area.