What are Real Estate Investment Trusts?

At DEGIRO, we believe it is important that you invest with sufficient knowledge. Furthermore, we would like to make sure that you trade financial instruments that suit your needs and objectives. This article explains what Real Estate Investment Trusts are and how you can trade them.

What is a REIT?

A Real Estate Investment Trust (REIT) is a company that usually generates income by producing and owning real estate. Some REITs are publicly traded on the exchange and some are not. By investing in REITs, investors are indirectly investing in the real estate the company owns. Like with ordinary shares of a company, investing in REITs usually gives the investor voting rights.

In contrast to other real estate companies, REITs do not develop real estate in order to resell it. REITs own or lease real estate property and consequently pay out the income from rent to investors. This is called dividend-based income. These properties can vary and can include everything from office buildings, hotels, retail centres, and houses, to data centres and cell towers. Since rents are usually stable, the income stream from a REIT investment can also be considered relatively stable in normal market conditions.

Requirements for REITs

In order to qualify as a REIT, a company must fulfil certain requirements. These provisions state, for example, how a REIT should be directed, what percentage of the assets should be real estate and what percentage of the taxable income should be returned to investors as dividends. These percentages depend on the country where the REIT originates.

Typical examples of some of these provisions are:

• Every REIT should be managed by one or more trustees or directors.
• REITs are obliged to distribute most of their taxable income to shareholders. Usually, around 90% has to be distributed.
• At least a certain percentage of the assets must be invested in real estate. This is typically around 75%.
• At least a certain percentage of its gross income must come from the rent or sale of real estate or the interest on mortgages. Usually, this is around 75%.
• The beneficial ownership must be held by a minimum of number of people. This could mean a REIT must have a least 100 shareholders. This must be the case on, for example, at least 335 days of a taxable year.

Different types of REITs

There are different types of REITs. These differences can be in the way investors can invest in them or in the product a REIT specialises in.

As mentioned before, a REIT does not have to be publicly traded. There are three classifications:

1. Publicly traded 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 regular stock exchanges, they have relatively high liquidity compared to investing in real estate directly. This means that investors can more easily buy and sell shares of the REITs on the exchange.
2. Non-exchange traded REITs: these non-listed REITs are available to investors but do not trade on major exchanges.
3. Private REITs: these REITs are not listed on a stock exchange and are generally not available to all investors. Only specific people, usually appointed by the Board of Directors of the REIT, can invest in these private REITs.

REITs can have different investments, such as real estate property, mortgages and more. Some examples of specialised REITs are:

• Mortgage REITs

  As you can imagine, mortgage REITs invest in mortgages. They are also known as mREITs. They may use mortgage or loans directly or mortgage-backed securities (MBSs) indirectly.

• Residential REITs

  Residential REITs typically specialise in residential properties. For example, this could be apartment complexes or single-family rental properties. This can be specialised even further; for example, some REITs solely focus on student housing or specific communities.

• Retail REITs

  Similar to the previous example, REITs can specialise in retail properties, such as malls, shopping centres and stores.

• Healthcare REITs

  These REITS focus solely on healthcare facilities. Within this category are hospital buildings, senior housing, medical offices and also wellness centres.

• Diversified REITs

  Contrary to the very specific REITs mentioned in the previous types, REITs can also be diversified. To qualify within this category, a REIT must own a combination of two or more types of properties. For example, this could be a combination of retail centres and office buildings.

Distribution

Distributions received from REITs are subject to different withholding tax than distributions received from ordinary shares and are often taxed more heavily. Before investing in a REIT, it is advisable to check the investor relations page of the REIT or consult with your local tax advisor. The applicable tax will depend on the type of distribution and the tax residency of the investor.

Pricing

Since REITs trade like stocks on an exchange, the price is determined every time a trade takes place in the market.

What are the risks and rewards of investing in REITs?

Investing in REITs can be beneficial, but it is not without risk. At DEGIRO, we are open and transparent about the risks associated with investing. Information about the investment portfolio of REITs is usually presented on the investor relations page of a REIT. It is advisable to read the investor relations page before investing in a REIT. When investing in a REIT, the maximum loss is the total invested amount.

The two ways an investor can benefit from an investment in a REIT are the regular income distributions and a potential price increase. Generally speaking, returns on REITs are from dividends rather than price appreciation. As most income is distributed to shareholders, capital appreciation is often low. However, this is not guaranteed.

The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.