REIT definition

A Real Estate Investment Trust (REIT) is a company or group of companies that operates, owns, or finances incoming-generating real estate. They are modelled after mutual funds, in which they pool the funds of numerous investors together. Investing in REITs allows investors to share in price moves in real estate without having to buy, manage, or finance property investments themselves. For a company, achieving REIT status means they can access funds and use them to purchase property or expand business operations.

The properties in a REIT tend to share an overarching theme. For instance, a healthcare REIT may own senior-living facilities, finance hospitals, medical office buildings or more. A residential REIT on the other hand may own student housing and apartment buildings.

How do REITs work?

REITs work much like mutual funds. A number of private investors will first contribute their own funds to create a single collective pool of funds. The company will then use this collective pool to build a portfolio of properties. These income-generating real estate assets can include shopping malls, office spaces, apartments, and hotels, which are rented out with the aim of generating income for the unitholders. The income will then be wholly distributed among shareholders on a regular basis. As such, REITs are best suited for long-term speculation and are ideal for yield investors.

Types of REITs

There are three main types of REITs. The main difference between them is whether they own, manage or finance real estate.

Equity REITs: This kind of REIT owns properties that are usually within the same sector. Revenue is generated through rent, which is then paid as dividends to its shareholders.

Mortgage REITs: This kind of REIT finances, instead of own, properties. Income is earned through interest on primary mortgages or mortgage-backed securities, and it is then paid to shareholders as dividends.

Hybrid REITs: These REITs own and finance properties, so they use both strategies to generate revenue.

REITS can also be categorised by how their shares are bought and kept:

Publicly traded REITs: Shares are listed on major stock exchanges such as the New York Stock Exchange (NYSE), where they can be bought and sold by individual investors. They are also regulated by the Securities and Exchange Commission (SEC), so they tend to be more transparent.

Public non-traded REITs: Non-listed REITs do not trade on the national securities exchange, but they are still regulated by the SEC. They are less liquid than publicly traded REITs but are also more stable because they are not affected by market fluctuations.

Private REITs: These REITs are not registered with the SEC and do not trade on any national securities exchanges. These REITs can only be sold to institutional investors.

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