What are REITs?
A Real Estate Investment Trust (REIT) is a kind of ETF that allows an investor to buy a portion of commercial real estate properties. It's a way for regular people to earn money from commercial properties and get rent in the form of dividends.
REITs let anyone buy into big groups of properties in the same way they'd buy shares or save in other funds. When you invest in a REIT, you get a piece of the profit they make from those properties without needing to own or take care of them. About 150 million Americans have money in REITs, usually as part of their retirement or other savings.
How Do REITs Work?
A REIT is like a big company that owns places like shopping centers, hotels, offices, apartments, holiday spots, storage units, big storage buildings, and even places for mobile signals. While many REITs own just one kind of place, some have a mix of different properties.
Usually, a REIT rents out these places and gets money from the rent.
To be recognized as a REIT, a company needs to:
- Put at least 75% of all its capital into properties.
- Get at least 75% of its earnings from property rents, loan interests related to property, or from selling property.
- Give at least 90% of its taxable earnings back to its shareholders every year.
- Be legally seen as a company.
- Have a team like a board or trustees making decisions.
- Have at least 100 shareholders.
- Ensure that no more than half of its shares are owned by just five people or fewer.
Top 10 US REITs as per Market Capital
| Name | Market Capital | 1 Day | 5 Days | 1 Month | 1 Year | 5 Years |
| Prologis Inc | 114.11B USD | 1.06% | 0.86% | 3.32% | 10.75% | 83.17% |
| American Tower Corp | 87.22B USD | 0.09% | 1.14% | 3.54% | 33.54% | 23.77% |
| Equinix Inc | 72.44B USD | 0.01% | 2.07% | 3.92% | 8.31% | 76.44% |
| Public Storage | 50.45B USD | 0.77% | 2.84% | 4.88% | 19.25% | 28.34% |
| Crown Castle Inc | 45.28B USD | 0.27% | 0.47% | 9.72% | 43.30% | 8.30% |
| Simon Property Group Inc | 38.89B USD | 0.02% | 0.12% | 1.99% | 4.96% | 33.40% |
| Realty Income Corp | 41.55B USD | 0.29% | 1.50% | 3.62% | 21.58% | 2.86% |
| Digital Realty Trust Inc | 36.43B USD | 0.36% | 0.08% | 1.73% | 9.59% | 2.98% |
| VICI Properties Inc | 31.30B USD | 0.23% | 0.80% | 1.97% | 13.06% | 49.44% |
| SBA Communications Corp | 24.93B USD | 0.76% | 3.71% | 5.62% | 35.22% | 45.77% |
Reasons for the growth of US REITs:
Over long periods, when interest rates go up, REITs usually do well. Why? Because higher rates often mean the economy is doing good. When the economy booms, there's a rise in interest rates, and this can be great for REITs.
Let us know how?
- REITs’ inverse relationship with interest rates: When interest rates fall, REITs can benefit since borrowing costs decrease and property values tend to increase, which can lead to higher dividends. Conversely, rising interest rates can pressure REITs. An investor anticipating changes in interest rates can use REITs as a hedge against other investments sensitive to interest rate movements.
- More People Renting Places: A good economy means more businesses and people are looking for places, which means more properties are filled.
- Higher Rents: With more people wanting places, those who own properties can charge more for rent.
- More Money Coming In: With higher rents and more properties filled, REITs see more money coming in.
- Properties are Worth More: With the demand for places high, the value of these properties also goes up.
- Bigger Payouts for Investors: With all the extra money, REITs can give more back to the people who invested in them.
In simple words, when the economy is good, REITs tend to benefit a lot.
Advantages of REITS:
A major perk of REITs is their high dividends. They must give 90% of taxable earnings to shareholders, often exceeding average S&P 500 stocks.
Another benefit is portfolio diversification. Not everyone has the cash to buy a large office space and get money from it. But REITs let regular folks invest in these big places and earn from them, without actually buying them.
One of the most important advantages of REITs is that they are more liquid than physical properties and there is no hassle of finding a buyer and a seller.
Disadvantages of REITS:
There are some downsides to REITs. One big one is taxes. The extra money you get from REITs might be taxed more because the Internal Revenue Service (IRS) doesn't see it like regular dividend money. So, you might end up paying more in taxes than you expect.
Another problem with REITs is how they react to changes in interest rates. Usually, when the big bank (Federal Reserve) increases interest rates to make people spend less, the value of REITs goes down.
Different REITs have unique challenges. For example, REITs owning hotels can lose money during economic downturns. Example: During the covid pandemic, the hotel industry saw a decline in their business operations due to travel restrictions.
How to invest in REITs?
Through Exchange: An investor can purchase REITs through the stock exchange. Since these are similar to ETFs (Exchange Traded Funds), they can be bought and sold daily like any equity share.
Through Mutual Funds: An investor can also invest in REITs through mutual fund companies. These mutual fund companies invest in both India-based and Global REITs. Investors can buy these mutual funds through their preferred brokers. Investors get the benefit of diversification and get exposure to global real estate markets.
Through Exchange Traded Funds: ETFs or exchange-traded funds also offer an opportunity to invest in REITs. These funds are traded on the stock exchanges and their value is determined by market forces. These ETFs invest only in REITs similar to mutual funds but offer more liquidity than mutual funds as they are traded on the exchanges.