Real Estate Investment Trusts
Real Estate Investment Trusts, known as REITs, are a way of investing in profit-generating real estate. They can often be traded on securities exchanges, allowing smaller investors to benefit from real estate dividends. In this article, we’ve explained the meaning of real estate investment trusts, their business plan, and how to get started trading REITs.
What Are Real Estate Investment Trusts?
The definition of a REIT is a company that owns and manages income-producing real estate. Real estate investment trusts are operated and owned by shareholders who make contributions to invest in commercial properties and holdings, such as office and apartment buildings, warehouses, hospitals, shopping centres, student housing, hotels, forestry and timberlands. Data centres are also becoming a common property type. REITs are best described as a pass-through vehicle for investors, a characteristic shared with LLCs.
Real estate investment trusts are financed by investors, who in return receive dividends from the company’s benefits. Many REITs, such as the Pennsylvania Real Estate Investment Trust (PREIT), obtain funds by being publicly traded on securities exchanges – meaning that investors can buy and sell them like stocks. They are liquid assets that can provide a constant stream of revenue to investors.
REITs are normally specialised in a region and a real estate sector. An example could be a London real estate investment trust that owns and manages several buildings where companies set up office spaces. In exchange for a capital pool for further purchases and maintenance, investors receive a part of the profits generated through rent. Another example could be a real estate investment trust for gas stations that owns the real estate under gas stations across Canada, or a REIT in Mexico that leases land to hotel developments.
Other REITs have diversified portfolios that protect them against one sector failing. For example, H&R is a real estate investment trust based in Ontario with residential, retail and industrial properties. You can buy H&R stocks, check the stock price and see the dividend history on the Toronto Stock Exchange.
This type is very common and is used to invest in property. Income is generated in the form of rent, mainly from leasing office space, warehouses, and hotels, and is distributed as dividends to shareholders.
In this type, earnings are generated from mortgages. Either through lending money to real estate owners or buying existing mortgage-backed securities. The profit from this investment comes from the margin between the interest earned on mortgage loans and the cost of funding these loans.
This is a combination of investments in properties and mortgages. This is achieved by owning properties while also lending to real estate investors. Income comes from both rent and interest.
Open-End REITs Vs Closed-End REITs
Open-end REITs have no limit on the number of shares that can be created. When you invest, new shares are created and your money is added to the investment pool. When you sell your shares, they will be dissolved and the money in the investment pool decreases by the value of the shares you sold. Net asset value (NAV) is calculated at the end of the trading day. This means when you sell your shares, the value will be calculated at market close.
Closed-end real estate investments trusts have a fixed number of shares. REITs going public raise money selling shares through an initial public offering (IPO) in the same way that corporations on the stock market do. Schroder Real Estate Investment Trust Limited is an example of a closed-ended real estate investment company. Just like stocks, these shares are worth as much as investors are willing to pay for them. This means value can fluctuate throughout the trading day.
How Does REITs Trading Work?
- Traded: You can often buy and sell stocks for real estate investment trusts on major exchanges, like the New York Stock Exchange (NYSE). Some exchanges will allow you to trade directly on their platform, or you might prefer to find a broker, such as Robinhood or Zerodha, that works with REITs. The value of a traded REIT can change quickly with market fluctuations.
- Public Non-Traded: You cannot purchase stocks for these REITs through exchanges, and instead will need to invest directly with the company. They are registered and regulated by official bodies.
- Private: Only accredited investors can trade with private REITs. Some countries do not allow private REITs as they are often more difficult to regulate. The price of private REITs is more stable as it does not depend on the market.
You can also consider REIT ETFs (exchange-traded funds). They are a diversified portfolio of REITs, meaning you don’t invest in a particular REIT, but a group of them. Real estate investment trust ETFs, which include companies such as Cominar, Crombie, True North Commercial REIT and the RioCan Real Estate Investment Trust, are popular in Canada.
Taxation Of Real Estate Investment Trusts
In most countries, a REIT’s income is not taxed if it complies with local regulations. Instead, the investors are taxed when they receive their dividends. This is a great benefit compared with dividends from other companies, which are taxed twice: at a corporate level when the company receives the profit, and at an individual level when the investor receives dividends.
Being a local or foreign investor also affects the level of tax you pay on the dividends from real estate investment trusts and how many shares you can hold. You don’t always have to choose a REIT that is near you, but you should always consult a local tax advisor before investing.
What Are The Features Of The Best Real Estate Investment Trusts?
There are many factors to consider when choosing REITs to invest in. Here are few things to look for:
- Public Vs Private: Consider if you want to invest in a listed or a private REIT. You don’t have to be Warren Buffett to consider private equity REITs, but you will need to be an accredited investor. Keep in mind they are not allowed in some countries. If you are looking at buying real estate investment trust stocks, ensure you find a good broker that allows you to access these assets. Public real estate investment trusts often have higher liquidity.
- Capital Growth & Property Type: The prospects of real estate investment trusts are often measured in terms of capital growth. The more a REIT is growing, the more likely it is that dividends are going to flow steadily and even increase. A REIT’s main property type and its growth are often linked – for example, data centre REITs are increasing in popularity, but office REITs might suffer as more employees start working from home.
- Yield: On average, real estate investment trusts produce a yearly yield (annual return rate) of around 4-6% depending on the property type. Finding a high-quality real estate investment trust with high dividends can be difficult but rewarding.
- Dividends: Each country determines which percentage of a REIT’s income should be paid to investors. This limit is usually between 85% and 100% of a REIT’s taxable income. Dividends can be paid monthly but are often paid quarterly. Look at a company’s dividend history for a track record of payments.
- Tax Status: A big benefit of REITs is that they have special tax breaks. Choosing a country where the tax laws are beneficial for both you and the REIT can increase your revenue. Also consider different ways of investing (as an individual, as a company, etc) and how they might benefit you. For example, in the UK dividends are often subject to a withholding tax, unless the dividend goes into a UK pension trust or charity.
- Gear Ratio: A real estate investment trust’s gear ratio is the debt-to-equity ratio and indicates if a company is financing itself mostly with debt or with its own funds. A lower gear ratio often means reduced risk, and in fact, some countries will limit a REIT’s gear ratio.
- Other Regulation: Some countries limit REITs to local investment, whereas others allow companies to hold properties abroad. For example, Singapore has more REITs with foreign assets than local assets, including real estate investment trusts with properties in Hong Kong, China and Japan. Conversely, some countries limit the amount of stock a foreign investor can have on a company.
Over 40 countries allow REITs to be traded, with different levels of regulation and varying law surrounding them. Some countries, like the Philippines, Pakistan, Malta, Zimbabwe and Sri Lanka, have only recently permitted real estate investment trusts. Filipino banks like BPI now offer REIT opportunities to their customers. Other countries like the United States have been trading them since the 1960 Act. These are a few examples of the regulation for real estate investment trusts in different countries:
In the USA, REITs have special tax benefits but must pay investors at least 90% of their taxable income. Public REITs must be registered with the SEC (Securities and Exchange Commission) and are often listed on exchanges like the NYSE. The structure and strategy of a real estate investment trust are highly regulated by the government. This applies throughout the country, including REITs based in Washington DC, Dallas, Texas and Utah. In 2016, S&P Dow Jones Indices and MSCI moved stock-exchange listed Equity REITs and other listed real estate companies from the financial sector of their global industry classification standard (GICS) to a new real estate sector. This change reflects the importance of real estate, primarily REITs, in the US economy.
Canada & Australia
In Canada and Australia, real estate investment trusts must distribute their whole net income to investors. REITs can be publicly traded on exchanges like the Montreal Exchange, the Toronto Stock Exchange (TSX) or the Australian Securities Exchanges (ASX), or operate privately.
Japanese REITs can also be public or private and there are many popular REITs in Asia such as O-Bank No. 1, Cathay No. 1, Fubon No. 1 and Millerful No.1 Real Estate Investment Trust, which are all Taiwan-based REIT funds.
In the UK, all REITs must be listed on a British stock exchange and registered with the Financial Services Authority. They must distribute 90% of their income as dividends. You can find out more about real estate investment trusts in the UK, and other investment opportunities, through companies such as Hargreaves Lansdown. Full details of how REITs are taxed in the UK can be found on legislation.gov.uk under The Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006.
The Rest Of The World
Real estate investment trusts are used in many African countries, including Kenya, Nigeria, Ghana, South Africa and Egypt and many REITs are available on The Johannesburg Stock Exchange (JSE). Many countries across Europe have regulated real estate investment trusts, like the Netherlands, Germany, Greece and Ireland. Most European countries that allow REITs require them to be listed in a public exchange, which means private REITs cannot exist. In Mexico, only public REITs benefit from tax breaks.
In Jamaica, REITs have not been officially regulated and therefore have no tax breaks. Luxembourg and New Zealand have not permitted REITs but a similar system exists. However, there is no obligation to pay dividends to investors.
There are many halal (Sharia-compliant) real estate investment trusts in Oman, Malaysia and the UAE, in particular Dubai.
Pros Of Real Estate Investment Trusts
- No Corporate Tax: REITs do not pay corporate tax on their income, meaning they have more capital to distribute among investors.
- High Yield: Because REITs are forced to pay most of their taxable income in dividends (usually 85%-100%), they usually have a higher yield than normal stocks.
- Access To Real Estate Benefits: The structure of real estate investment trusts allows small investors to access the benefits of real estate without needing the management expertise to exploit it.
- Portfolio Diversification: If you are investing in multiple types of assets, real estate investment funds are a good way to diversify your investment portfolio.
- High Liquidity: Public, listed REITs have high liquidity in the stock market, and they are a lot easier to buy and sell than real estate property.
- Transparency: Public real estate investment trusts must be transparent in their operations and they are often heavily scrutinized.
Cons Of Real Estate Investment Trusts
- Taxes At The Investor Level: Even though REITs often have no corporate taxes, investors receiving dividends will be taxed. Depending on the regulations of each country, REIT dividends can end up being taxed higher than other dividends.
- Long-Term Investments: As most real estate investments, REITs are aimed to produce benefits long-term. They are not the best asset if you are looking at short-term benefits.
- Lack Of Diversification: One criticism of REITs is that they tend to be specialised in a particular industry, which means they have little diversification. If that type of property loses its value, it’s likely the REIT will do too. REIT ETFs are a way of avoiding this.
- Market Volatility: Although REITs are not a very volatile asset, public REITs are subjected to market fluctuations and therefore the price might not always be linked to the quality of the REIT and its properties.
How To Start Buying Real Estate Investment Trusts
If you are a qualified investor, you will have access to private REITs such as Pier 4 Real Estate Investment Trust. However, most investors trade with public REITs on exchanges. Here is our step-by-step guide on getting started with public REITs:
Investigate Taxation Regulations In Different Countries: As we discussed above, many countries regulate REITs differently, and the tax and ownership limitations for foreign investors vary. Consider how much you are thinking of investing, how ownership limitations might affect you, and find a country with good tax laws for your status. However, investing in foreign countries can be problematic. For example, Granite is a Canadian-based REIT that is considered to be a US partnership for US federal income tax purposes. Therefore, American unit holders are required to include their allocatable share of Granite Real Estate Investment Trust’s income and deductions in their individual tax returns as reported in their respective Schedule K-1.
Once you have a country or two you are interested in, look up where REITs are listed – for example, if you are looking at Canadian REITs, they are likely to appear on the Toronto Stock Exchange. You might also want to consider REIT ETFs.
Find A Broker: Look for a broker that gives you access to your preferred exchanges and ETFs. These are a few things to look out for in a broker:
- Market Access: Not all brokers offer REITs, so make sure to check the restrictions in your country.
- Security: For optimum security, choose a broker that is regulated in the country that you are trading from or by other highly-regarded regulatory bodies.
- Fees: REITs can sometimes have high fees and added charges for withdrawals that might reduce your earnings even further. Find a broker with a low or small deposit and minimal transaction and withdrawal fees.
- Document Access: Some brokers will allow you to access a REIT’s financial documents directly through their platform, and these are very useful when choosing the best REITs for you. Although the documents can easily be found on government websites, it’s handy to have them accessible through your broker.
Select REITs: Search your chosen broker’s website for a list of real estate investment funds traded, and analyse them looking at their yield, dividend history, growth potential, activities and property type. Check out our section above on features of a good REIT for more information. It’s a good idea to select REITs that have both high dividends and prospects for growth. You should also look at the share price fluctuations.
Purchase Shares In The Real Estate Investment Funds: When you feel the REIT is in a good position, purchase shares. You will not be able to use leverage.
Receive Dividends: You will be paid a fee per share monthly, quarterly or yearly on dates determined by the REIT. It will likely be paid through your broker, who might keep a fee.
Sell, Buy And Reinvest: Once you are comfortable with how buying REITs work, you can sell your current ones or reinvest your dividends to buy others.
Where Can I Learn More About REITs?
If you are looking at learning more about real estate investment trusts, there are plenty of resources out there both online and on paper. You will find many handbooks, textbooks and PDFs published with detailed information, both for dummies and experienced traders. For example, some of the best books include Investing in REITs: Real Estate Investment Trusts, 4th Edition; Real Estate Investment Trusts Structure Performance And Investment Opportunities and Moody’s Banks 1956 book Insurance and Real Estate Investment Trusts. BF Saul Real Estate Investment Trust also has free online PDFs and for detail on taxation and regulation, firms like KPMG offer a wealth of information on their website.
Websites like Investopedia, Wikipedia and YouTube will have easy-to-follow tutorials and guidelines for REIT investing. Kiplinger is a publisher that concentrates on business forecasts and personal finance advice, available in print and online, and has compiled top 10 lists of the largest and best real estate investment trusts in 2021. You can use social forums like Reddit, ZoomInfo and TD Ameritrade to learn from other investors and hear about opportunities, such as REIT financial modelling and analyst jobs. Journal articles are a great way to keep up with the latest developments in real estate investment trusts, and of course, you can use resources like Yahoo Finance to see the state and history of individual REITs. Once you have carried out your research, why not test yourself using flashcards on Quizlet?
Final Word On Real Estate Investment Trusts
Real estate investment trusts (REITs) and REIT funds (known as REIT ETFs) give investors access to the benefits of real estate even with small amounts of capital. REITs are required to distribute most of their income, so they often produce high-yield dividends that can translate into a steady income. To get the most out of your investment and minimise the risks, choose REITs carefully according to their outlook, past performance, dividend history and growth potential. Investing in an ETF will ensure you have a diversified portfolio.
What Are Real Estate Investment Trusts?
Real Estate Investment Trusts (REITs) are companies that own and manage real estate that produce income. These properties can be office buildings, hotels, shops and malls, warehouses or forests. REITs that go public can be traded on exchanges, which allow investors to profit on regular dividends without needing the capital to own the property itself.
Which Countries Regulate Real Estate Investment Trusts?
REITs can be traded in over 40 countries, including the UK, the USA, Australia, Kenya, Nigeria, Ghana, South Africa, Egypt, the Philippines, Japan, the Netherlands, Germany, Greece, Ireland, Pakistan, Malta, Zimbabwe and Sri Lanka.
Are Real Estate Investment Trusts Halal?
It is possible to trade Shariah-compliant REITs which are Halal. They are commonly found in Arabic and Muslim practising countries such as Oman, Malaysia and the UAE.
What Are The Best Real Estate Investment Trusts To Buy?
Whether you are in Vietnam or Vancouver, finding the ideal real estate investment trust and deciding whether it is worth it will all depend on the trader. Be sure to look out for important factors such as yield, dividends, taxes and gear ratios. It is always worth comparing large funds, such as the Vanguard Real Estate Investment Trust ETF or Fidelity REIT Index Fund, with other options to find the best investment for your portfolio. Check out our list of the top brokers for trading REITs in 2021.
Are Real Estate Investment Trusts Taxed?
Many countries give tax breaks to REITS. Investors are instead taxed when they receive their dividends. You can use an online real estate investment trust tax calculator to help you figure out what your benefits may be. We always recommend consulting a local tax advisor before investing in REITs.