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Real Estate Investment Trust (REIT) – Definition and Example

Investing into real estate has always been a popular choice because of the stable flow of income it can generate while also being less risky than stocks for example.

But even though the advantages can sound promising, there are also some things that might make it hard to get started in this field. Even the smallest properties will still cost you many thousand euros and create a bigger entry barrier than other types of investment. Even if the starting capital is high enough, the possibility to diversify a portfolio of real estate is restricted.

If you ever owned a building you are probably also aware of the troubles. Damages in the building, problems with tenants, and strict building laws that vary from city to city. REITs might be a solution to many of these problems and they are gaining more and more popularity.

REIT Definition

A Real Estate Investment Trust or REIT is a company that owns and operates commercial real estate in order to create a return for their investors.

History of REITs

REITs started to exist in the 1960s and were introduced in the United States with the law 86-779, which allowed individuals to invest in large, diversified portfolios of income-producing properties.

Following, in 1986, a new Tax reform came into place that helped to accelerate the growth of REITs. From now on, the same entity was allowed to manage and own the real estate.

As of today, 40 countries have adopted the principle and in the US alone, the market capitalization has reached $1.35 trillion.

What qualifies as a REIT?

To qualify as a REIT in the US, a company has to comply with the following rules, introduced by the IRS:

  • Invest at least 75% of total assets in real estate
  • Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
  • Pay at least of 90% of taxable income in the form of shareholder dividends each year
  • Be an entity that’s taxable as a corporation
  • Be managed by a board of directors or trustees
  • Have at least 100 shareholders after its first year of existence
  • Have no more than 50% of its shares held by five or fewer individuals
A large city from above

Advantages

  • High liquidity, as they can be traded easily on the stock exchange
  • Diversified, because they own a large number of properties within a region or type
  • Steady income from rental payments of the real estate
  • Good return, in comparison to the risk that comes with it
  • Less capital required in order to enter the real estate market

Disadvantages

  • Slower growth than other assets
  • Dependent on geographical location and its performance
  • Dependent on building type and its performance
  • Sometimes high fees for transactions and management

What are the Biggest REITs?

After getting to know Real Estate Investment Trusts, you can see how big their potential is and that they see large growth. But what are the biggest REITs in existence?

As of January 2020, the 10 biggest companies are all located in the United States and have a total market capitalization of around $471 billion.

  1. $102.3 billion – American Tower
  2. $58.9 billion – Crown Castle International
  3. $56.6 billion – Prologis
  4. $50.7 billion – Equinix
  5. $44.4 billion – Simon Property Group
  6. $37.7 billion – Public Storage
  7. $33.6 billion – Welltower
  8. $30.1 billion – Equity Residential
  9. $29.1 billion – AvalonBay Communities
  10. $27.5 billion – SBA Communications
Skyscrapers in a large city

What are Sustainable REITs?

With the increasing importance of sustainability, this topic has also influenced real estate to a great extent and thus also affects REITs. Many companies are trying to incorporate environmental, social and governance sustainability into their portfolio of buildings. 

This is why it is important to inform in-depth about the companies you are going to invest in. Some of the most sustainable REITs, according to Barron, are:

  • Kilroy Realty Corporation
  • Macerich
  • Welltower Inc.
  • Equinix, Inc.
  • Host Hotels & Resorts, Inc.

Conclusion

A Real Estate Investment Trust or REIT is a good way for individuals to invest into a diverse portfolio of real estate without having to manage them by themselves. Since they started in the 1960s, these types of companies have grown significantly up to a market capitalization of trillions of dollars. Even sustainability is a big topic for REITs and it can be a good way to invest into smart and green buildings.

If you want to learn more about commercial real estate, smart buildings and PropTech, feel free to take a look at our other articles.

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