What Is a Real Estate Investment Trust: Equity, Dividends, & Risks


A REIT is a type of real estate company that benefits for tax purposes by distributing at least 90% of the profit to the shareholders. I like dividends, I like REITs

So, what is a real estate investment trust or REIT?

A Real Estate Investment Trust (REIT or REITs) is a company that usually generates income by constructing and owning properties. Some REITs are traded on the stock exchange and others are not. By investing in a REIT, the investor invests indirectly in the properties that the company owns. As with ordinary shares in a company, investing in REITs usually gives the investor the right to vote.

Requirements for REITs

To qualify as a REIT, a company must meet certain requirements. These provisions state, for example, how a REIT is to be managed, what proportion of the assets are to be real estate and what percentage of the taxable income is to be returned to the investors as a dividend.

These percentages depend on the country in which this REIT has its registered office.

Typical examples of some of these provisions are:

  • Each REIT shall be managed by one or more trustees or board members.
  • All REITs are obliged to distribute most of their taxable income to the shareholders. Usually about 90% must be distributed.
  • At least a certain proportion of the assets must be invested in real estate. It is usually around 75%.
  • At least a certain percentage of gross income must come from rents or sales of real estate or the interest rate on mortgages. Usually it is around 75%.
  • The real beneficiaries must be more than a certain minimum number of people. This may mean that a REIT must have at least 100 shareholders. For example, it must be that way for at least 335 days of a financial year.

What are the different types of REIT?

There are two types of REITs, and the fact is that they are very different from each other.

1. Equity REIT

An equity REIT is a REIT that owns and manages properties.

Their income consists of rental income from their properties.

Many REITs specialize in a particular type of building. These can be, for example, warehouses, offices, apartments, homes, shopping centers, independent shops, healthcare facilities, industrial properties, data centers, and so on.

It also happens that they specialize in a specific geographical area, such as a certain region or city – while others are more diversified and own properties a bit everywhere.

Of all REITs, about 90 percent are equity REITs.

2. Mortgage REIT

A mortgage REIT is a REIT that invests in and owns real estate loans.

They thus own the debt on the property, and not the property itself. Their income consists of the money paid in from customers for the purpose of amortizing and paying interest.

This type of REITs can be very volatile and move up and down a lot. They have a significantly higher risk than an equity REIT that owns the property itself. They are also more affected by how the interest rate develops.

The profit in a mortgage REIT is the net margin between their cost of borrowing the money and the interest that the customer pays to them. This means that they can be affected by how the interest rate moves.

Of all REITs, about 10 percent are mortgage REITs, and it is thus not as common as an equity REIT.

Different types of REITs

There are different types of REITs. The differences can be in how investors can invest in them or in which product a REIT specializes in.

As mentioned earlier, a REIT does not need to be traded on the stock exchange.

There are three classifications:

  • Listed REITs: this type can be bought and sold on major stock exchanges, such as the NYSE and the London Stock Exchange. Since many REITs are traded on ordinary stock exchanges, they have relatively high liquidity compared to investing directly in real estate. This means that investors can more easily buy and sell shares in a REIT on the stock exchange.
  • Unlisted REITs: these unlisted REITs are available to investors, but are not traded on the major exchanges.
  • Private REITs: These REITs are not listed and are generally not available to all investors. Only specific individuals, usually selected by the board of directors of this REIT, may invest in these private REITs.

A REIT can be focused on various investments, such as real estate, mortgages and more.

Some examples of specialized REITs are:

1. REITs for home loans

As the name implies, investors list these REITs in home loans. They are also indicated by the designation mREIT.

They can provide direct mortgages or loans, alternatively indirect securities against collateral (morgage backed securities – MBS).

2. REITs for housing

REITs for housing are usually specialized in residential properties. It can be, for example, an apartment complex or a single-family house.

It can be further specialized – for example, some REITs focus only on student housing or on specific communities.

3. REITs in retail

Like the previous example, REIT can specialize in retail properties, such as malls, shopping malls and stores.

4. REITs for healthcare

These REITs focus only on healthcare facilities. Within this category are hospital buildings, nursing homes, medical clinics and also wellness facilities.

5. Diversified REITs

In contrast to the very specific REITs mentioned in previous types, REITs can also be diversified. To qualify in this category, a REIT must own a combination of two or more types of properties.

It can, for example, be a combination of shopping centers and office buildings.

What are the possibilities with a REIT?

Thanks to REITs, investors have the opportunity to invest in real estate in a way that does not require much capital and also in assets that are liquid and frequently traded on an exchange.

It is common to have a high direct return among REITs, which means that you can build a dividend portfolio where you own different REITs in order to thus have a regular cash flow of dividends to the portfolio.

They do not fully correlate with either “ordinary” equities or bonds, and they therefore give investors the opportunity to diversify their portfolio to some extent.

REITs also tend to have a relatively stable price development, although more turbulent times can of course also occur.

Dividends from REITs

Dividends from REITs are subject to a different withholding tax than other dividends from ordinary shares and are often taxed more heavily.

Before investing in a REIT, it is recommended that you read the investor information page for this REIT or consult your local tax advisor. The tax rate that applies depends on the type of dividend and the investor’s tax domicile.

Pricing on real estate investment trust’s

Since REITs are traded in the same way as shares on a stock exchange, the price is determined each time a transaction takes place on the market.

Conclusion

What are the risks of a REIT?

There is a risk with all types of investments, and this also applies to REITs and real estate in general.

Properties can fall in value, tenants can have problems paying, and a general pessimism among investors can affect the company’s share price.

A higher interest rate can also have a significant effect on a REIT. This is because REITs usually distribute a lot, which means that investors compare them with the “yield” they can get on bonds or similar investments.

I can therefore simply say that REITs and bonds are fighting for the same capital.

While REITs can be relatively stable investments, they also tend to be very volatile to and from.

They can thus swing a lot up and down during certain periods, and it is good to know if you are considering buying a REIT.

It happens that REITs issues new shares / participations to finance acquisitions and purchases of various properties. This means that you as an existing shareholder are “diluted”, which in short means that your shareholding in the company will be a little smaller.

However, this does not do much in good REITs that perform well because their increased revenue and earnings offset this over time.

Kevin

Hi, my name is Kevin and I am a weightlifter, now part time blogger. Keep in mind that I dont have any fancy degrees or operate some high-end business company. I am just a dude from Sweden who loves to learn new things, especially new things on how I can inqrease my wealth. And now I have the opportunity to share that knowledge back to you.

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