Diversification of an Investor’s portfolio has become the gold standard for prudent investment practice. As one can buy a stake in a business by buying the shares of the company on the stock exchange, so can one buy a stake in a piece of real estate by buying REITs on the same stock exchange.
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate assets such as shopping malls, offices or hotels, usually with a view to generating income for unit holders of the fund(i.e. investors of the REITs). It is created when a corporation or trust invests in real estate and real estate-related investments, using investors’ money.
Assets of REITs are professionally managed and revenues generated from assets (primarily rental income) are normally distributed at regular intervals to investors. REITs allow investors to access real property assets, and share the benefits and risks of owning a portfolio of properties.
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This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
- REITs offer tax advantages to investors and provide a liquid way to invest in real estate, which is an otherwise illiquid market. Most REITs are publicly traded like stocks, which makes them highly liquid (unlike physical real estate investments).
- Another benefit of REITs is that they allow investors to share in non-residential properties like hotels, malls, and industrial properties.
- REITs require no minimum investment and do not necessarily increase and decrease in value along with the broader market.
- They pay yields in the form of dividends no matter how the shares perform. REITs therefore generate a steady income stream for investors but most often offer little in the way of capital appreciation.
- REITs can be valued based on fundamental measures – similarly to stocks – but different numbers tend to be important for the valuation of REITs.
There are three principal types of REITs:
Equity REITs: They purchase, hold and manage commercial and rental properties. Though they will finance these properties in many cases, their primary focus is on profits through acquisition and management.
Mortgage REITs: They do not purchase, own or manage properties. They invest in mortgages on real estate properties. Though these properties serve as collateral for the loans the mortgage REIT invests in, the REIT has no ownership position in the property itself.
Hybrid REITs: They combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.
Why Invest in REITs?
- Total Return: REITs typically provide high dividends plus the potential for moderate, long-term capital appreciation. They also have regular cash flows since most of the revenues are derived from rental payments under lease agreements with specific tenure.
- Liquidity: A major benefit of investing in REITs is the reduction of the liquidity risk associated with holding physical properties. Through a REIT, the individual investor has access to invest in commercial real estate without the normally associated large capital of purchasing buildings directly.
- Competitive Yield: REITs typically have a competitive yield compared with other types of investments. In some jurisdiction, regulation requires that most of the income generated by a REIT is passed on to the shareholders, as compared to income generated by most operating companies in which the board may determine to distribute a substantially lower portion of the company’s income to shareholders.
- Portfolio diversification: REITs offer portfolio diversification given the underlying assets are actual buildings, rather than an equity or fixed-income security. Also, REITs typically own multiproperty portfolios with diversified tenant pools. This reduces the risk of relying on a single property and tenant in the case of directly owning a real estate asset.
- Minimal investment risk: REITs own hard, tangible assets like land and buildings. As the mortgage holders on the properties they own, the REIT is a higher-priority “creditor” of corporate tenants than are bond or stock holders of that tenant company.
- Professional Management: A REIT employs a staff of professionals who oversee the management of the portfolio of real estate assets. These specialized employees provide a variety of services including day-to-day oversight, management, accounting, leasing, marketing and related support.
What are the associated risks with REITs?
The risks associated with a REIT investment vary and depend on the unique characteristics of each REIT (e.g. leverage ratio, cost of refinancing, alignment of management fees), as well as the geographical location and quality of the underlying property investments (e.g. concentration of properties, length of lease). Other risks associated with stock investing (e.g. price risk, volatility and liquidity risks) also apply.
It is necessary for investors to study the specific REIT prospectus, in order to understand its investment objective and details of the properties to be acquired before making an investment decision.
Who invests in REITs?
There are no regulatory restrictions on eligible investors in REITs therefore all classes of investors are eligible including individual investors (retail and high net worth) and institutional investors such as PFAs, Insurance Companies, Funds etc. Foreign Portfolio investors can also invest in REITs.
REITs are available to retail investors just like other shares. They cater for the liquidity risk in holding physical property and an investment in REITs typically represents an investment that is diversified across a range of real estate properties in a variety of geographic locations.
How do investors own REITs?
Investors own REITs directly, through REIT mutual funds or through REITs Exchange Traded Funds REITs are listed and traded on Stock Exchanges.
As with other securities, an individual may invest in REITs by purchasing desired units via the initial public offer or in the secondary markets through a securities dealer.
Costs of trading REITs in the secondary markets are same as for buying or selling any other publicly traded stock. REITs are traded like shares on the Exchange. There prices are market driven and are quoted real time just as stocks.
Origins of REITs
The origins of REITs is traceable to the United States of America where the US congress in the 1960’s created the legal framework for REITs with a view to providing affordable access to investment in commercial property to all investors.
Over the years, many countries around the world have come to adopt the REITs structure as a component of their securities market.
As at 2011, there were 22 countries and territories around the world that have established REIT regimes.
In Nigeria, the enactment of the Investment and Securities Act, in the year 2007 paved the way for the introduction of REITs.
That same year, the first ever REITs in Nigeria – the N2bn (US$10m) Skye Shelter Fund, was launched following the issuance of guidelines for registration and requirement for operation by the Securities and Exchange Commission (SEC).
There are presently three registered REITs in Nigeria namely:
- SFS Real Estate Investment Trust (NSE Ticker: SFSREIT). It has a Market Capitalization of N1.386 billion, and 20,000,000 outstanding units.
- Union Homes Real Estate Investment Trust (NSE Ticker: UHOMREIT). It has a market capitalization of N10.163 billion and 250,019,781 outstanding units.
- UPDC Real Estate Investment Trust (NSE Ticker: UPDCREIT). It has a market capitalization of N10.139 billion and 2,668,269,500 outstanding units.