REITs are capital market institutions that operate a portfolio of real estate and real estate-based capital market instruments and invest in real estate-based projects. In summary, you become a real estate investment partner and receive your share of the income from that real estate in the form of profit sharing. This is the real estate investment trust, model. REITs invest in many types of real estate, including apartments, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses.
What Does Real Estate Investment Trust (REIT) Do?
With REITs, individual investors can get a share of the income from commercial real estate ownership. A REIT is essentially a private company that owns or operates various assets related to income-generating real estate. This company may include mortgages or loans in various real estate areas. Unlike other real estate companies, a REIT does not develop real estate to sell them. Instead, a REIT primarily purchases and develops property to operate as part of its investment portfolio. This ensures that the profit is certain.
How do REITs Work?
Real estate investment trusts can only operate within the scope of operating a portfolio based on real estate. Consequently, real estate investment trusts cannot keep machinery and equipment in their assets. Besides, they cannot undertake the construction works themselves, and they cannot carry out projects, but they can provide financing for the projects that other companies construct. The company can transform into a real estate investment trust, provided that it changes its current activities to those of real estate investment trusts.
What are the Benefits of REITs?
The decision of how to finance a real estate or a project depends on the size of the project, usage and construction rights, and profitability potential of the company. The tax incentives applied as a result of the government’s perception of the housing and real estate problem as a public phenomenon make real estate investment trusts attractive in real estate financing.
For investors, it cannot be denied that real estate and real estate-based investments create a psychological element of trust. Moreover, issues such as reducing risk through diversification, financing the investment with borrowing, and, depreciation are the factors that make real estate investment attractive for investors.
Investors can not only sell their real estate investment trust shares in the stock market but also have the opportunity to benefit from the possible price increases of these shares in the stock market. Furthermore, because the portfolio of the company is managed by experts in the field of real estate, more effective results can be obtained than any individual investing on his/her own.
We can see that international organizations are investing in these companies. To benefit from real estate returns in developing countries, these institutions prefer to get real estate investment trust shares, which are traded in the secondary markets that operate in an organized manner, rather than direct real estate investments.
What are the types of REITs?
Since Real Estate Investment Trusts are established in various ways, they have several categories. Looking at different real estate investment trusts can help investors understand the profits and returns they can have as a result of these specialized financial products.
The types of REITs are listed below.
- Hybrid REITs
- Equity REITs
- Mortgage REITs
- Publicly Traded REITs
- Public Non-Traded REITs
- Private REITs
1. Hybrid REITs
A hybrid REIT can both own and manage real estate, offer to finance mortgage loans, and purchase mortgage-backed securities. Income comes from both sources i.e. rental income and interest.
2. Equity REITs
Equity REITs own and manage the property, especially real estate, and earn income by collecting rent.
3. Mortgage REITs
Mortgage REITs can provide fund loans for mortgage loans as well as mortgage-loaned securities. The income from this investment comes from interest earned on mortgage loans.
4. Publicly Traded REITs
The fields of activity of publicly-traded REITs, raise funds by offering their shares to the public and investing the funds they collect in real estate; buying rental real estate, investing in asset-backed securities, financing mass construction projects, and construction.
5. Public Non-Traded REITs
A non-traded REIT is a form of real estate investment method that is designed to reduce or eliminate tax while providing returns on real estate
6. Private REITs
A private REIT is a specific type of real estate investment trust that is not publicly traded. Private REITs and other REITs called public REITs are part of modern options for real estate investments with diversified funds. Knowing more about these financial instruments will help investors make the right decisions with their money.
How to Invest in REITs?
As stated in the Capital Markets Board of Turkey, it is sufficient to instruct an investment institution trading in the stock exchange to invest in real estate investment trust shares.
However, real estate investment trusts can also be invested in the primary market. Investors get several rights through real estate investment trusts. These rights can be listed as follows.
- In case of distribution of profit, the Right to receive his share from the profits of the partnership
- Right to liquidation share in case of liquidation of the partnership
- Priority right in acquiring new shares in the capital increase of the partnership
- The right to participate in the general assembly meetings, to speak and make suggestions
- Right to vote at general assembly meetings
- The right to get information, examine and audit the activities and accounts of the partnership.
Why is Real Estate Investment Trust (REIT) Advantageous?
Real Estate Investment Trust (REIT) Advantages are explained below
- Liquidity: Liquidity is one of the most important reasons for wanting to invest in REITs. It is already known that real estate, defined as an asset class, has a good risk-return profile. But REITs additionally provide great returns compared to other investments, and the downside risk is not high. In addition, securities sold by REITs are traded on many stock exchanges around the world. Therefore, they can be traded like shares of a blue-chip company.
- Diversification: REITs offer their investors the opportunity to diversify. Real estate investments require a significant financial commitment on the part of the buyer. Thus, investors can only invest in several places at the same time. For example, condos, offices, retail outlets, etc, own these properties in different markets. Therefore, they have enough diversity to protect themselves from the risks that any micro market can present.
- Choice: REITs offer many options to individual investors. Numerous types meet the needs of different investors. Therefore, Real Estate Investment Trusts attract both risky and risk-averse investors.
- Predictability: Real Estate Investment Trusts provide a lot of predictability to their investors. The main investment made by REITs is real estate. Therefore, a net return on cash flows from such a fund can be predicted with a high degree of accuracy and certainty.
- Professional Management: Real Estate Investment Trusts include multiple businesses managed by qualified professional investors. Therefore, each of them has its autonomous methodologies and they make decisions according to these rules. It is very unlikely that the management of Real Estate Investment Trusts will make erroneous decisions regarding the management of any property.
What are the Risks of Real Estate Investment Trusts (REITs)?
As for the risks, REITs might not offer much in terms of returns. However, some REIT dividends are taxed and have high transaction fees. Also, slow growth, market risk, and high transaction fee are among the cons of REITs.
Why Should Investors Consider REITs?
First of all, we can say that REITs can be easily bought and sold. Because REITs are traded on most stock exchanges. In terms of performance, real estate investment trusts offer attractive risk-balanced returns and stable cash flows. Additionally, a real estate asset can be a very good choice for the diversification of investors’ portfolios. REITs are advantageous in terms of diversity and dividend income.
There are several reasons real estate investment trusts should be in the portfolio of long-term investors. First of all, REITs are reliable and growing sources of income for those new to investing. Well-managed REITs generally yield a stable and generally satisfactory profit. Because of this feature, they are long-term investments. However, it is quite advantageous when it comes to portfolio diversification.
How To Avoid REIT Scams?
You need to be aware of these important points to avoid REIT scams;
- As defined in Turkish Banking Law No. 5411, real estate investment trusts cannot collect deposits and cannot do business and transactions that will result in deposit collection.
- Under no circumstances may they undertake the construction works of the real estate themselves, and cannot acquire personnel and equipment for this purpose.
- Under no circumstances may they operate hotels, hospitals, shopping malls, business centers, commercial parks, commercial warehouses, housing estates, supermarkets, and similar real estates for commercial purposes and employ personnel for this purpose.
- REITs cannot provide project development, project control, financial feasibility, follow-up of legal permits, and similar services to other persons and organizations, except for projects that are or will be the subject of the portfolio, through their personnel.
- They cannot engage in commercial, industrial or agricultural activities.
- They cannot give credit.
- Real estate investment trusts are not able to enter into a debit-credit relationship with their related parties that is not based on any purchase and sale of goods or services.
- They cannot continuously buy and sell short-term real estate.
How have REITs Performed in the Past?
REITs have gone through many structural changes since they first emerged in 1960. High-risk loans are taken for the development of the construction industry between 1960 and 1970, and the real estate crisis in the mid-1970s negatively affected the development of real estate investment trusts.
REITs, which started to hold various real estate investments in the 1980s, remained weak in terms of their growth potential, and they achieved their rise only after the 1990s. In the 1990s, market structures changed dramatically, characterized by strong internal stockholders, low leverage ratios, and long-lived active management structures. According to claims, corporate investors, whose share in real estate ownership has increased, have contributed to these positive developments.