What are REITs or Real Estate Investment Trusts (REITs) ? Real Estate Investment Trusts (REITs) have become the de facto replacement of buying physical property when it comes to investing in real estate. Why are they so popular with investors too.
They have produced above average returns to many global investors and this has led to the growing popularity of the Real Estate Investment Trusts (REITs).
Today, investing in REITs is as important as investing in bonds or gold or ETFs. REITs have gone from being an alternative investment class to being a critical class that has become the choice of the many high class investors.
In this article, I will explain in detail what Real Estate Investment Trusts (REITs) means and why they provide a more beneficial way to invest in real estate.
In some cases it is better to buy REITs than to buy a property itself.
What are REITs : Concept of Real Estate Investment Trusts (REITs)
About five decades ago, the concept of Real Estate Investment Trusts (REITs) was first introduced in the United States.
The concept of REITs is simple pooling of resources to buy properties. Just like a unit trust, REITs allow investors to benefit from diversification and professional expertise of the fund managers.
The REITs pool in the money collected from a lot of individuals or corporates or even investment funds. Then they use money from this pool to invest long term in properties. They then earn the money from rental of the properties and are supposed to distribute these rental profits as payouts.
However, the individual investor need not be in for a long term investment too. Real Estate Investment Trusts (REITs) are listed on the stock market too. Therefore, any individual investor can sell their REIT shares to other investors in the stock market at the ongoing price.
These then provide the individual investor with much needed liquidity that is usually absent when one makes real estate investments. After all, a physical real estate takes a much longer time to sell for cash.
What are REITs : Buying REITs is like buying into a business
REITs invest the money that they have collected in real estate. However, it would be incorrect to assume that Real Estate Investment Trusts are nothing more than a vehicle for passive investing. In reality, investing in REITs is like investing in a business.
This means that if two Real Estate Investment Trusts are given the exact same amount of money, they will end up making very different returns based on how they are managed.
In fact, if they are given the exact same real estate properties to manage, the returns would still be pretty different!
Hence, the returns provided by Real Estate Investment Trusts (REITs) depend a lot on the fund manager’s management expertise and style.
Therefore, buying a share in Real Estate Investment Trusts (REITs) is equivalent to buying shares in a business.
What are REITs : Specialization
One of the biggest changes that have happened in the Real Estate Investment Trusts (REITs) space is that the industry has become highly specialized.
When the industry first came into existence, the trust would buy pretty much any property that they could get their hands on.
For instance, they would buy commercial office space, malls, factories, empty land and even residential homes.
With the growing importance of clouding computing, the hottest ones now are those who specialise in data centres REITs.
However, over time, the industry realized that the risk reward profiles of different types of properties can be very different. As such, REITs started to focus in one specific property type rather than spreading the eggs around.
Today, most Real Estate Investment Trusts (REITs) will state the type of property that they only invest in and the accompanying risk rewards in their investment brochure or web sites.
Investors therefore have to be careful and be more in control over where their money is being invested. They have to do their due diligence and homework.
Future of REITs
At the present moment, the short term future of the Real Estate Investment Trusts (REITs) is considered to be negative.
This is because the Fed is causing interest rates to raise. REITs is a business that are highly dependent on borrowed funds. A high interest rate environment is bad for REITs.
The Real Estate Investment Trusts (REITs) are therefore expected to see a period of turmoil in the forthcoming years. We might not see the continued growth of real estate price increases as before.
