To most people, real estate investing is limited to residential ownership with little thought of owning shopping complexes, industrial warehouses or office buildings etc. Now, real estate investors can literally stretch their investment horizon with REITs (pronounced “reets”) which combine the best features of real estate and trust funds. They give an investor a practical and effective means to include professionally-managed real estate in a diversified investment portfolio. It also allows small investors a means to invest in real estate assets through a vehicle that is highly liquid compared to buying a real estate itself and with a smaller investment capital.
What is REIT?
Real estate investment trust or REIT is a collective investment vehicle (typically in the form of a trust fund) which pools money from investors and uses the pooled capital to buy, manage and sell real estate assets, such as residential or commercial buildings, retail or industrial lots, or other real estate-related assets (e.g. shares in public-listed property companies, listed or unlisted debt securities of property companies etc.). It is a passive investment vehicle which acquires and holds income generating real estates. REITs are driven entirely by recurrent rental income from real estates and with the present tax structure governing REITs, distribute at least 90% of its income to unit holders, thus providing stable and consistent income to unitholders.
T he objective of REITs is to obtain reasonable investment returns. Total returns are generated from the rental income plus any capital appreciation that comes from holding the real estate assets over the period. Unit holders will receive their returns be in the form of dividends or distribution and capital gains for the holding period.
REIT is an asset class that sits between bonds and equities. Its features are more similar to bonds than equity stocks. With their regular and stable yields, REITs should appeal to risk averse investors.
How does it work?
In essence, REITs work like any other trust funds which involve the following parties:
|
