What are REITs?

The structure and law for REITs (Real Estate Investment Trusts) differs country to country. However, most have the following characteristics:

  • A REIT owns a portfolio of income-producing properties with high occupancy, producing a steady rental income
  • REITs are required to pay out at least 90% of their profit as a dividend
  • REITs are tax-efficient (do not pay corporate tax, income is only taxed at the REIT holder level)
  • REITs are traded on a stock exchange
  • REITs can be viewed as corporations even though their structure is fund-like
  • REITs tend to give investors specific sector or country exposure

What are the benefits of REITs?

Compared to a direct or a private equity investment in real estate, REITs trade on a stock exchange and therefore offer a much higher degree of liquidity. Buying a share of a REIT is essentially buying a share of the ownership and cashflow of the portfolio of buildings that the REIT owns.

Due to the mandatory high dividend payments, REITs offer a high yield and the possibility to profit directly from the rental income, as a direct owner would. The high payout ratio encourages capital discipline as there is no excess cash in the business.

REIT managers need to come back to the market to raise additional equity to grow their portfolio once the (relatively low) leverage limits are reached. This process encourages acquisitions that are 'accretive' to the existing portfolio.

REITs have to maintain a high level of Corporate Governance to be listed, for example third-party property valuations are required, which offers further protection for investors.

Historically, REITs’ correlation to bonds and equities falls over time, making them an attractive addition to a portfolio. REITs have lower volatility, better returns and low correlation compared to equities and can provide some hedge against inflation.

Other benefits include: unlocking capital, lowering particpants' cost of capital, generating additional economic output, creating jobs, improving the quality of real estate assets and therefore the experience of the users of those assets, adding liquidity to a traditionally illiquid asset class.

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