What are REITs? | Investement Products (2024)

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.

What are REITs? | Investement Products (2024)

FAQs

What are REIT products? ›

What are REITs? Real estate investment trusts (“REITs”) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets.

What is a reit in simple terms? ›

A Real Estate Investment Trust (REIT) is a security that trades like a stock on the major exchanges and owns—and in most cases operates—income-producing real estate or related assets.

What are the most common type of REITs? ›

Most REITs are traded on major stock exchanges, but there are also public non-listed and private REITs. The two main types of REITs are equity REITs and mortgage REITs, commonly known as mREITs. Equity REITs generate income through the collection of rent on, and from sales of, the properties they own for the long-term.

What is the most significant feature of a REIT? ›

REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.

What are the three types of REIT? ›

The Three Types of REITs

There are three to choose from: Mortgage REITs, or mREITs. Equity REITs, or eREITs. Hybrid REITs.

Can I start my own REIT? ›

Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the 5/50 Test).

What is REIT and how does it work? ›

A REIT (real estate investment trust) is a company that makes investments in income-producing real estate. Investors who want to access real estate can, in turn, buy shares of a REIT and through that share ownership effectively add the real estate owned by the REIT to their investment portfolios.

What are the top 5 largest REITs? ›

Largest Real-Estate-Investment-Trusts by market cap
#NameM. Cap
1Prologis 1PLD$96.34 B
2American Tower 2AMT$80.17 B
3Equinix 3EQIX$69.43 B
4Welltower 4WELL$55.75 B
57 more rows

How do REITs make money? ›

REITs make their money through the mortgages underlying real estate development or on rental incomes once the property is developed. REITs provide shareholders with a steady income and, if held long-term, growth that reflects the appreciation of the property it owns.

What is the most profitable REIT? ›

Best REITs by total return
Company (ticker)5-year total return5-year dividend growth
Prologis (PLD)121.8%12.4%
Eastgroup Properties (EGP)107.9%13.3%
Gaming and Leisure Properties (GLPI)99.7%1.1%
Extra Space Storage (EXR)98.5%14.0%
4 more rows
Jan 16, 2024

What is the highest paying REIT? ›

The market's highest-yielding REITs
Company (ticker symbol)SectorDividend yield
KKR Real Estate Finance Trust (KREF)Mortgage14.0%
Two Harbors Investment (TWO)Mortgage14.0%
Ares Commercial Real Estate (ACRE)Mortgage13.8%
Brandywine Realty Trust (BDN)Office13.6%
7 more rows
Feb 28, 2024

Are REITs a good investment? ›

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

Who is the largest REIT owner? ›

The five largest REITs in the United States in 2021 are: American Tower Corporation, Prologis, Crown Castle International, Simon Property Group and Weyerhaeuser.

What type of property do REITs usually invest in? ›

REITs invest in the majority of real estate property types, including offices, apartment buildings, warehouses, retail centers, medical facilities, data centers, telecommunications towers, infrastructure and hotels.

Why are REITs high risk? ›

Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.

Are REITs good or bad investments? ›

Investing in REITs can be a passive, income-producing alternative to buying property directly. However, investors shouldn't be swayed by large dividend payments since REITs can underperform the market in a rising interest-rate environment.

What are REITs and how do they work? ›

REITs, or real estate investment trusts, were created by Congress in 1960 to give all individuals the opportunity to benefit from investing in income-producing real estate. REITs allow anyone to own or finance properties the same way they invest in other industries, through the purchase of stock.

Is buying REIT a good investment? ›

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

Are REITs still a good investment? ›

Real estate investment trusts, or REITs, are a great way to invest in the real estate sector while diversifying your options. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.

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