REIT’s (Real Estate Investment Trusts)
Over nearly half a century, the U.S. real estate investment trust (REIT) industry has become an important
segment of the U.S. economy and investment markets. U.S. REITs have seen their equity market capitalization
soar from $90 billion to more than $300 billion in just the past 10 years. In the process, that growth has
set the stage for the adoption of the REIT approach to securitized real estate investment across the globe.
Congress created REITs in the U.S. in 1960 as a way to make investment in large-scale, income-producing
real estate accessible to all investors in the same way they typically invest otherwise – through the purchase
and sale of liquid securities. Prior to the creation of listed real estate equities, access to the investment
returns of commercial real estate equity as a core asset was available only to institutions and wealthy individuals
having the financial deep pockets to undertake direct real estate investment.
In order for a company to qualify as a REIT in the U.S., it must invest at least 75 percent of total assets
in real estate; deriving at least 75 percent of gross income as rents from real property or interest from mortgages
on real property; and distributing annually at least 90 percent of taxable income to shareholders in the form of
dividends. Resource:
NAREIT
"The commercial [real estate] market has not been dragged down by the residential
mortgage mess because for the most part, buyers and sellers are more sophisticated, and they have more financial
flexibility and resources to ride out credit-market turmoil"
—Dan Caterinicchia, AP Business Writer
REIT’s provide limited liability, centralized management, and liquidity*. Private or Non-Traded REIT’s is
often the strategy of institutional investors because they are less susceptible to stock and bond market volatility,
however they are less liquid as a result.
* Publically traded REITs sell on national stock exchanges and can be readily
redeemed.
“Over the past 15 years, REIT’s also have
delivered risk-adjusted returns superior to bonds, commodities and other investments
that also provide low correlation to the stock market. In fact, we have conducted
research that demonstrates over the last 15 years there is no other type of investment
that provides the same combination of both diversification power and risk adjusted
returns as REIT’s”
—Brad Case, Vice-President, Research and Industry Information for NAREIT, the National
Association of Real Estate Investment Trusts
Based on S&P Index on commercial properties
based on 5 key demographic areas in the U.S., commercial property is a non-correlated
to the stock market. Volatility is significantly lower than stocks and lower
than bonds. Even in the dot.com burst of 2000-2001,
commercial real estate did not waiver.
Goal: Purchase interests in high-quality
real estate that will provide immediate income from tenant rents and will appreciate
in value so that they can ultimately be sold at a profit.
Assumptions: Real estate values will fluctuate
based on economic and environmental factors.
Liquidity: Investment life of 3-10 years.
Public REIT’s that are privately traded are illiquid for generally 12 months. Thereafter,
the investor may incur a surrender charge.
No Capital Calls: An investor’s liability
is limited to their original capital contribution.