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Real Estate Investment Trusts (REITs) have become the buzzword when it comes to investing in real estate. They have provided above average returns in countries like the United States where they were first implemented. This has led to the growing popularity of the Real Estate Investment Trusts (REITs) and today more countries in the world are adopting this investment structure. In this article, we will explain in detail what Real Estate Investment Trusts (REITs) means and why they provide a more beneficial way to invest in real estate than other legal structures.
About five decades ago, the concept of Real Estate Investment Trusts (REITs) was first introduced in the United States. Ever since, this idea has grown tremendously in terms of market acceptance. REITs have gone from being an alternative investment class to being an investment class that has become the choice of the majority.
The concept of REITs is simple. Just like a mutual fund allows investors to benefit from diversification and professional expertise of the fund managers, so do these trusts. These trusts pool in the money collected from a lot of investors. Then they use money from this pool to invest long term in properties. However, the individual investor need not be in for a long term investment. Real Estate Investment Trusts (REITs) have a secondary market. Therefore, any individual investor call sell their share of the investment to other investors in the market at the ongoing price.
Since prices for shares of Real Estate Investment Trusts are quoted on a real time basis, these trusts provide the individual investor with much needed liquidity that is usually absent when one makes real estate investments.
REITs invest the money that they have collected in real estate. However, it would be incorrect to assume that Real Estate Investment Trusts are nothing more than a vehicle for secondary investments in realty. In reality, investing in Real Estate Investment Trusts (REITs) is like investing in a business.
This means that if two Real Estate Investment Trusts are given the exact same amount of money, they will end up making very different returns based on how they are managed. In fact, if they are given the exact same properties to manage, the returns would still be pretty different! Hence, the returns provided by Real Estate Investment Trusts (REITs) depend more on their management expertise and style than other factors. Therefore, buying a share in Real Estate Investment Trusts (REITs) is equivalent to buying shares in a business.
Real Estate Investment Trusts started in 1960’s in the United States wherein they were amateur investments. President Eisenhower had signed the REIT Act into existence. The idea was to provide the average investor the benefit of investing in commercial properties. Prior to REITs such investments were only available to huge financial institutions and extremely wealthy individuals. With the advent of REITs, the masses could now have access to the same investments!
The idea of Real Estate Investment Trusts (REITs) became extremely popular in the United States as multiple legislations were created in the future to enable efficient functioning of these trusts. The idea then became so successful that today it has spread worldwide. Many countries such as Malaysia, Australia, Hong Kong and even developing nations like Ghana have embraced the concept of Real Estate Investment Trusts.
One of the biggest changes that have happened in the Real Estate Investment Trusts (REITs) space is that the industry has become highly specialized. When the industry first came into existence, the trust would buy pretty much any property that they could get their hands on. For instance, they would buy commercial office space, malls and even multi-property residential homes. However, over time, the industry realized that the risk reward profiles of each of these investments are different. As such, companies started specializing in one of these property types. Today, most Real Estate Investment Trusts (REITs) will exclusively state the type of property that they invest in and the risk rewards that accrue as a result in their investment brochure. Investors therefore have more control over where their money is being invested.
At the present moment, the short term future of the Real Estate Investment Trusts (REITs) is considered to be negative. This is because the Fed is about to announce its QE tapering program. QE tapering is expected to hit all asset classes. However, one of the worst hit is going to be real estate. After all, real estate has been the source at which the entire crisis which led to QE and QE tapering started.
The Real Estate Investment Trusts (REITs) are therefore expected to see a period of turmoil in the forthcoming years. However, the long term outlook on real estate seems good. Since, Real Estate Investment Trusts are one of the best ways to invest in real estate the long term outlook on REITs seems good by extension.
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