The shares of real estate investment funds (REITs), has been a popular method of getting exposure to the market. Find out how you can speculate on the price movements of REITs.
A real-estate investment trust, also known as a REIT, is an entity that invests in income-producing assets. These trusts enable individuals and companies to pool money to purchase properties and reap the benefits of any price increases.
REITs were created to be similar to mutual funds. However, instead of investing in stocks the companies invest in property.
REITs were first established in the USA in 1960. In South Africa they were introduced in 2005 in the hope of fuelling speculation and the growth of the real estate industry. It was so popular, most of the major property-linked businesses were included in REITs.
Types and types of REIT
REITs in South Africa specialize in a particular type of realty asset or sector. But, in general they can be broken down into two categories: mortgage and equity.
The equity REITs are funds that own physical property. They earn their income by renting out space and collecting rent. The income is then distributed to shareholders as dividends. Equity REITs are usually publicly traded and may include companies that deal in residential, commercial, or hospitality real estate.
Another type of REIT is the mortgage REITs (or mREITs) in the US. These funds invest in mortgages and mortgage-backed securities. They don’t actually own the properties, but only the debt associated with them. They earn income from the interest rates that are associated with these investments.
Why would you want to invest in REITs
The reason why REITs are so popular is that they allow investors to access assets that would otherwise be prohibitively expensive. While property may not seem like a viable investment for you, it is more affordable when there are other investors and companies.
REITs are also very popular due to their status as publicly traded companies. They can be traded on the national stock exchanges in the same way that conventional shares. As with all listed companies the market participants determine the value of REIT’s shares throughout the day. Investors and traders can benefit from price movements.
The potential for long-term return is one reason REITs are popular. They offer similar returns to other publicly traded companies. This is due to the possibility to profit from price changes as well dividends that are paid out to investors. Legally, REITs must provide at least 90% rental income to shareholders.