What Is A Real Estate Investment Trust?
A real estate investment trust is an entity that owns, operates, and finances properties that generate income.
It provides an opportunity for investment in real estate especially in cases where investors are unable to finance downright property acquisition through the purchase of shares in a real estate investment fund, or REIT.
It is security where shareholders contribute money to get stakes in commercial properties such as office and apartment buildings. Also included are warehouses, complexes, hospitals, arenas, hotels, hostels, and timberlands, infrastructure-in the form of fiber cables, cell towers, energy pipelines- and get, in return, an outlet for regular earnings, income diversification, and long-term capital appreciation.
As in any other security, they receive special tax considerations and can be publicly listed on the stock exchange market.
REITs have been in existence for over 50-years and were originally devised in the United States in 1960 under the Cigar Excise Tax Act.
They were first listed on the New York Stock Exchange (NYSE) in 1965. The following decades saw their spread in the European and Asian stock markets.
They have the following requirements:
- A minimum of 100 shareholders or investors, with none holding more than half the shares.
- At least 75% of investments in real estate, cash, or treasuries.
- Management by a Board of Directors or Trustees
- Paid dividends of at least 90% of taxable income to shareholders.
There are three(3) types of REITs:
- Equity REIT: It is a commonly used form of REITs that invest in properties. It is obtained via rent, leasing office space, warehouses and hotels, and is eventually distributed.
- Mortgage REIT: Here, the earnings are generally obtained from mortgages, lending to real estate owners, or buying currently existing mortgage-backed securities.
- Hybrid REIT: Combination of investments in properties and mortgages by the ownership of properties and extension of the loans to the real estate investors.
Multiple streams of income come from both rent and interest.
Real Estate Investment Trust Example
AEW UK REIT is a real estate investment trust that is traded on the London Stock Market. It owns many commercial properties in the UK including Diamond Business Park in Wakefield, Vantage Point in Hemel Hempstead, and Cedar House in Gloucester.« Back to Glossary Index