ASSET MANAGEMENT/INVESTMENT

MANAGEMENT.

REAL ESTATE INVESTMENT TRUSTS (REITs).

What are REITs?

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 utilize 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.

How Does a Company Qualify as a REIT?

To qualify as a REIT, a company has to meet specific requirements as mentioned

below.

1. The entity needs to be structured as a business trust or a corporation.

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 2. Extends fully transferable shares.

3. Is managed by a team of trustees or a board of directors.

4. Must have a minimum of 100 shareholders.

5. Less than 5 individuals should not have held 50% of its share during each
taxable year.

6. Is required to pay at least 90% of the taxable income as a dividend.

7. Accrue a minimum 75% of gross income from mortgage interest or rents.

8. A maximum of 20% of the corporation’s assets comprises stock under taxable

REIT subsidiaries.

9. A minimum of 75% of investment assets must be in real estate.

10.A minimum of 95% of REITs total income should be invested.

Types of Real Estate Investment Trust (REIT)

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.

 Equity.

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.

 Mortgage.

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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.

 Hybrid.

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.

 Private REITs.

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.

 Publicly traded REITs.

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.

 Public non-traded REITs.

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.

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Advantages of REITs.
REITs are similar to mutual funds, but rather than investing in stocks; they invest in real estate
assets. The nature of REITs gives them several benefits that mutual funds do not. The following
are the advantages of REITs.

1 | They Diversify Your Investment Portfolio

One of the essential considerations you make when investing is how to minimize your risk.
REITs enable you to diversify your investment portfolio hence minimizing your risk. The
prospect of reducing your risk makes this one of the more prominent REIT Advantages and
Disadvantages.

But, how do REITs enable you to mitigate your risk? REITs own or operate many types of real
estate properties. A branched-out pool of tenants means that the REIT experiences lower risk
than companies investing in single properties with few tenants.

For example, if you own a single retail outlet that shuts down because of unforeseen
circumstances, its value would depreciate. Moreover, you will earn no rental income when it
stops operating. To reduce the impact of such a loss, a REIT invests in multiple real estate
projects with different characteristics. Therefore, if the performance of some investments
declines, profits from other investments steady the REIT’s income.

Diversification is not just about risk, though. REITs also enable you to invest in properties across
states, cities, and countries. People unable to invest in overseas properties can get involved by
investing in REITs.

2 | Above Average Investment Returns.

REITs are an excellent way for people to build their passive income. Returns are a critical part of
most REIT Advantages and Disadvantages. For starters, REITs must disburse a minimum of
ninety percent of their taxable income to investors. Therefore, the dividend yield to shareholders
is above average for most REITs.

There are many REITs with more than a 5% dividend payout, while the average yield for stocks
is two percent or lower. REITs are therefore ideal for people who wish to reinvest their
dividends. In the past 20 years, the return for REITs has outperformed the S&P 500 Index and
the inflation rate.

In addition to providing high returns, REITs also allow for stable capital appreciation in the long
term. They are one of the most popular long-term investment vehicles available.

3 | High Earning Potential.

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One of the REIT Advantages and Disadvantages comes from the fact that the underlying asset in
REITs is real estate. When the underlying asset’s value increases, your earning potential follows
suit.

The value of real estate investment often increases in the long run. With this knowledge, most
REITs employ strategies to create additional value for their shareholders. For instance, they
could sell off properties that have appreciated significantly to generate capital for new projects,
which might provide higher short-term growth. The underpinning reason is that most real estate
projects grow fastest when they are newly completed, but the rate of growth levels off and might
eventually stagnate.

By combining high dividends and capital appreciation, REITs provide their shareholders with
substantially better return potential. REITs often deliver returns that beat the market for many
consecutive years.

4 | High Liquidity.
Buying and selling physical properties might take a long time, and you might incur high costs.
However, buying shares in a public REIT takes much less time and effort. If you want to
liquidate the money in your REIT investment, you can sell it at the click of a button.

You also get significantly better liquidity from a private REIT compared to owning physical
property. Most private REITs allow you to sell your shares back to them at a slight discount for
the first few years. The transaction takes minimal time and is much easier than dealing with
direct property sales.

5 | REITs Give you Access to Commercial Real Estate.

Few REIT advantages and disadvantages beat the opening up of investment in commercial
properties. Investing in commercial real estate properties is usually reserved for people with
access to significant capital.

With REITs, however, you can invest in data centers, shopping malls, apartment complexes, etc.
If you have a particular commercial property you want to invest in, you could look for a REIT
that invests in the property and buy its shares.

6 | Minimal Management and Acquisition Headaches

Most people who have invested in physical properties know the pain involved in buying, selling,
and managing properties.

The truth is that nobody wants tenants calling them at 3 AM to complain about blown fuses.
Furnaces like to break down at the worst times, and termites might be eating your investment
without your knowledge. All these are annoyances that most investors do not want.

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A REIT has professionals that deal with resolving the minor inconveniences that investors could
not be bothered to fix. When you invest in a REIT, you can forget about it and go about your
other affairs as you wait for the dividend checks.

7 | REITs are a Consistent Income Stream.

Many assets managed by REITs have long-term leases associated with them. Therefore, income
flow from these investments is mostly assured to continue predictably.

8 | Invest as Little as you Want.

Many REITs do not specify the minimum amount you can invest. Therefore, they are ideal for
people who want to invest but do not have a lot of disposable income.

Disadvantages of REITs.
REITs suffer from some of the drawbacks of investing in stocks. These are the most significant
disadvantages of investing in REITs.

1 | Weak Growth.
REITs that trade on the stock exchange disburse a large proportion of their income to investors.
Unfortunately, very little money is left to allow a REIT to grow its portfolio. Fortunately, private
REITs do not follow the same rules and may be able to retain more earnings for further
investment.

2 | High Taxes on Dividends.

The dividends you earn from REITs are subject to higher taxes than other investments.

You are usually only supposed to pay a capital gains tax on dividends. However, REIT returns
do not qualify—they are subject to ordinary income tax rates. Of course, this largely depends on
the country you live in.

3 | Potentially High Fees and Risk.

Even if a REIT is SEC-registered, it doesn’t mean it is low-risk. Investors should consider
factors such as interest rates, the real estate market, tax laws, geography, etc., before investing in
REITs.

Some REITs may use these factors to justify charging high management fees and transaction
fees. The result is a lower payout to investors.

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On a positive note, most fees that a REIT charges are often in the fine print.

4 | Trends Affect the Performance of REITs.

Compared to other investments, REITs are vulnerable to the goings-on in the real estate market.
For instance, if a REIT has a significant investment in rental properties in a location with
diminishing rental income, the returns for shareholders are likely to trend downwards.

Fluctuations linked to the real estate market are more problematic for REITs to avoid because it
is their sole investment destination.

5 | Little Control Over Performance.

The level of control of the investment is one of the REIT Advantages and Disadvantages that
favors people who invest in physical properties. If you invest funds by yourself, you can cherry-
pick properties with high returns, aggressively promote vacant rental spaces, and thoroughly
screen applications for rental agreements to maximize revenue and minimize risk. You have
much tighter control of how you implement real estate best practices.

On the other hand, if you invest in a REIT, you can’t do anything to influence the performance of
your investment. If you don’t like its returns, your only viable option is to sell it. Another
downside is that some private REITs don’t allow you to sell your shares for several years after
buying them.

Conclusion.
There can be no better proof of the relative safety of investing in the real estate market.
Some analysts are concerned that the housing market has been burning too bright.
However, even if there is a correction, it might have little effect on the performance of real
estate investments in the long run. There is consensus that one of the REIT Advantages and
Disadvantages is that it is an excellent long-term investment despite suffering from
significant short-term upheavals. REITs are the perfect investment vehicle for anybody
looking to invest while avoiding the volatility of the stock markets.

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