REITs or real estate investment trust can be described as a company that owns and operates real estates to generate income. Real estate investment trust companies are corporations that manage the portfolios of high-value real estate properties and mortgages. For instance, they lease properties and collect rent thereon. The rent thus collected is later distributed among shareholders as income and dividends.
Typically, REITs offer investors an opportunity to possess high-priced real estate and enable them to earn dividend income to boost their capital eventually. This way, investors can utilise the opportunity to appreciate their capital and generate income at the same time.
Both big and small investors can park their funds into this investment option and reap benefits accordingly. Small investors may attempt to pool their resources along with other investors and invest the same into large commercial real estate projects. Properties included in REITs comprise data centres, infrastructure, healthcare units, apartment complexes, etc.
To qualify as a REIT, a company has to meet specific requirements as mentioned below.
In a broader sense, the types of business REITs are involved with tend to help classify them better. Also, the methods devised to sell and purchase shares further help classify REITs.
The following is a list of the different types of REITs.
This type of REIT is among the most popular ones. Typically, it is concerned with operating and managing income-generating commercial properties. Notably, the common source of income here is rents.
Also known as mREITs, it is mostly involved with lending money to proprietors and extending mortgage facilities. Further, REITs tend to acquire mortgage-backed securities. Mortgage REITs also generate income in the form of interest accrued on the money they lend to proprietors.
This option allows investors to diversify their portfolio by parking their funds in both mortgage REITs and equity REITs. Hence, both rent and interest are the sources of income for this particular kind of REIT.
These trusts function as private placements, which cater to only a selective list of investors. Typically, private REITs are not traded on National Securities Exchanges and are not registered with the SEBI.
Typically, publicly-traded real estate investment trusts extend shares that are enlisted on the National Securities Exchange and are regulated by SEBI. Individual investors can sell and purchase such shares through the NSE.
These are non-listed REITs which are registered with the SEBI. However, they are not traded on the National Stock Exchange. Also, when pitted against public non-traded REITs, these options are less liquid. Plus, they are more stable as they are not subjected to market fluctuations.
Investors who park their funds in a REIT can benefit in these following ways.
The accompanying table highlights the pros and cons of investing in top REITs.
|Liquidity||Lack of tax benefits|
|Option to diversify||Market risk|
|Transparent||Low growth prospect|
|Risk-adjusted returns||High maintenance fee|
|Steady dividend income||Other additional charges|
Since REITs own and manage high-value real estate properties, they are one of the most expensive avenues of investments. Consequently, investors who park their funds in REITs are those who have substantial capital at their disposal. For example, big institutional investors like insurance companies, endowments, bank trust departments, pension funds, etc. can suitably invest in these financial tools.
Role of REITs in a Retirement Portfolio
Including REITs in one’s retirement portfolio tends to prove beneficial for investments in several ways. The following pointers help gain valuable insight into the same.
Exposes portfolio to a diverse mix of properties
By including real estate, one can diversify his/her asset classes significantly and does not require managing them personally. Additionally, with diversification, price fluctuation of other investment options would not have an impact on REITs. Rather, it can be said that in a falling market, the value of REITs does not drop as fast as stocks.
Opportunity to generate earnings
When the value of REIT appreciates, investors tend to earn substantial returns. Also, these companies are required to distribute as much as 90% of their taxable earnings to their shareholders, serving as an avenue to generate steady income.
Suitable for the long run
Unlike stocks and bonds which follow a business cycle of 6 years, REITs are more in sync with the movement of the real estate market. Notably, such movement tends to last for over a decade and hence further suitable for investors who are looking for a long-term investment horizon. In turn, it proves to be a profitable investment avenue for retirement planning.
Helps hedge inflation
As per research, REITs enables investors to hedge the effects of inflation in the long run. For instance, by staying invested for a term of 5 years, investors can protect their funds from inflationary effects more effectively as compared to stock options.
Like popular public stock, investors may decide to buy shares in a particular REIT that is enlisted on the major stock exchanges. They may do so in the following three ways.
Notably, REIT as an investment option tends to resemble mutual funds, the only difference being that REIT holds properties instead of bonds or stock options. Additionally, REIT investors are entitled to avail the assistance of financial advisors to make more informed decisions in terms of investing in an appropriate REIT option.
Investors can assess the merit of a particular REIT effectively if they factor in these following tips.
Lastly, individuals should make a point to find out how their investments would be compensated. For instance, they should scrutinise the management team of REIT and their performance record with the help of metrics like fund from operations or financial management rate. Similarly, it would prove beneficial to factor in a REIT’s growth in EPS and current dividend income before investing to maximise returns.