REIT’s provide high returns on investments and a potential for high moderate long term appreciation.
18th July 2013
The REIT regime, combined with the traditional strengths of the capital markets, has created opportunities for growth of the property investment sector. The legislation setting out the rules for REIT’s in the United Kingdom came into effect in January 2007 and in the following years, a number of larger listed property groups converted to UK-REITs. REIT’s enable property companies to access equity markets and to give end investors performance related to the underlying property assets, and also avoid tax in the process.
There are many REITs registered with the Securities and Exchange Commission in the United States, as well as many REIT’s that are not traded on a stock exchange. Some REIT’s invest in a variety of property types including shopping centres, apartments, warehouses, office buildings and hotels. Others specialize in a single property type, for example, health care REIT’s specialise in health care facilities including acute care, rehabilitation and psychiatric hospitals, medical hospital buildings, nursing homes and other health care facilities.
What is REIT ?
A Real Estate Investment Trust (REIT) is a type of real estate company modelled after real estate funds. REIT’s may invest in the properties themselves, generating income through the collection of rent, or they may invest in mortgages or mortgage securities tied to the properties, helping to finance the properties and generating income. These mutual fund type investment, allow anyone to invest in portfolios of large scale properties the same way they invest in other industries, through the purchase of stock. The stockholders of REIT are benefitted in a similar way the shareholders benefit by owning stocks, the stockholders of REIT earn a share of the income generated through real estate investment, without actually having to go out or buy properties.
Examples of REIT’s
REIT’s own many of the shopping malls, apartment buildings, housing complexes, office buildings, cell towers that we use in our daily lives. It is generally classified into two categories.
Equity REIT: They derive most of their revenue from rent.
Mortgage REIT: They derive most of their income from interest earned on their investments in mortgages or mortgage backs securities.
Real Estate Investment Trusts can be registered with the stock exchanges and have their shares listed and traded on major stock exchanges.
Qualification Criteria
A company in order to qualify as a REIT has to
- Invest at least 75 percent of its total assets in real estate
- Derive at least 75 percent of its gross income from real estate property, mortgage interest, financing real property from sales of real estate.
- Pay at least 90 percent of its taxable income in the form of share holder dividend each year.
- The company should pay taxes to the respective state where it is registered
- It should be managed by a board of directors or trustees
- Must have a minimum of 100 shareholders with no more than 50 percent of its shares held by five or fewer individuals.
Who Invests in REITs?
Individual investors in the U.S., and worldwide invest in REIT’s directly or through its mutual funds. Other buyers include exchange traded funds, pension funds, endowments, foundations, insurance companies and bank trust departments.
Why invest in REIT’s?
REIT’s provide high returns on investments, they provide high dividends and a potential for high moderate long term appreciation. Long term total returns of REIT stocks are likely to be lesser when compared to high yielding stocks. The real estate investment trusts are required by law to distribute each year 90 percent of its taxable income in the form of dividends to its equity share holders. The income from dividends is generated from the relatively stable and regular stream of contractual rents paid by the tenants who occupy the REIT’s properties.
Global Listing of Property Market
The most comprehensive index for the REIT and the global listed property market is the FTSE EPRA/NAREIT Global Real Estate Index Series, which was created jointly by the index provider FTSE Group, NAREIT and the European Public Real Estate Association (EPRA). The index is used by a variety of institutional investors, money managers and funds to manage real estate investment globally, it contains both REIT’s and non-REIT listed property companies.
Glossary of REIT terms
Adjusted Funds from Operations (AFFO)
This term refers to a computation made by analysts and investors to measure a real estate company’s cash flow generated by operations.
Capitalization Rate (Cap rate)
The capitalization rate for a property is calculated by dividing the property’s net operating income by its purchase price.
Cash Available for Distribution (CAD)
It is a measure of REIT’s ability to generate cash and to distribute dividends to shareholders.
EBITDA
It is earnings before tax, depreciation and amortization. This is sometimes referred to as net operating income.
Equitization
The process by which economic benefits of ownership from a tangeable asset, such as real estate are, divided among numerous investors and represented in the form of publicly traded securities.
Securitization
It is the process of financing a pool of similar but unrelated financial assets by issuing to investors security interests representing claims against the cash flow and other economic benefits generated by the pool of assets.