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Real Estate Investment Trusts (REITs)
Real estate investment trusts, or REITs (to rhyme with the word “treats”) are companies that own or manage portfolios of real estate assets from which they derive an ongoing income. These assets may include commercial offices, industrial space and residential apartment buildings. The benefit offered by the US government over the last 40 years to these companies is to provide major tax breaks provided they distribute a large percentage of their income to private investors, normally in the form of dividends. By following this requirement, REITs benefit from the payment of low or even zero corporate income tax. It should be pointed out that while the REITs themselves reduce their tax burden, investors in these funds will be subjected to capital gain and regular income tax payments.
Essentially REITs were set up in the US in the 1960’s to offer a real estate equivalent of what mutual funds are to stock markets. The idea gathered momentum during the 1970’s, and now the majority of the world’s industrial nations offer identical benefits to large real estate companies and their associated small investors.
In 2005, there were over 200 REITs in the United States with a total asset value in excess of 500 billion USD. 65% of those REITs are currently traded on recognized national stock exchanges. Additional requirements for the REIT companies include 75% of their assets needing to be in real estate. Furthermore, 75% of their income must come from rent or mortgage interest from those properties in their portfolios.
REIT performance is measured by such fund barometers as Net Asset Value (NAV), Adjusted Funds from Operation (AFFO) and Cash at Disposal (CAD). Any investor looking to invest in one of the many REITs on the market will examine these measures to determine those companies providing the best return. Yields from these investment vehicles often approach, and sometimes exceed returns offered by triple-A bond investments, and should certainly form a significant part of any smart investor’s portfolio.
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