A real estate investment trust refers to a company that is in ownership of a real estate that is already producing income as earnings per share. These companies own commercial real estate such as hotels, hospitals, warehouses, offices, timberlands, health care facilities and energy pipelines etc. Additionally, the properties could be agricultural or residential. However, all these companies must fulfill certain requirements. REITs came into being in 1960 after Dwight D. Eisenhower, President of the United States approved and signed the law 86-779. Today, over 30 countries in the world have established their own REITs. There are two major RIETs; Mortgage REITs and Equity REITSs. They may be working under the government or privately. REITs’ portfolios might be made up of various types of properties or they may specialize in a certain sector. Then, they invest all their effort and time in that particular sector or industry.
Types of REITs
This classification indicates what kind of business the real estate investment trust Australia are dealing with. Equity REITs are quite common. They buy real estate that generates incomes. Their job is to manage this real estate. In this kind of REIT, the income comes from rent. Mostly, the properties in the portfolio are not sold. Mortgage REITs invest their money in real estate owners. This money is given to the real estate owners as mortgage and the REIT earns from interest margin. In these business dealings, the factor of interest rate increment comes into play. Lastly, there are Hybrid REITs that have the characteristics of both the aforementioned types. This type gives out loans and owns rental property. The REITs’ portfolio might be more inclined towards property holding or mortgages, depending on where they are putting most of their investments.
Benefits of REITs
REITs use the money of their shareholders to invest money in real estate and then either resell the space or lease it. The rent collected from this real estate is then divided among the shareholders as their dividend. There are many benefits of REITs including transparency, diversification and liquidity. Historically, it has been seen that REITs allow people to invest their money like mutual funds and stocks. Moreover, the portfolio can be rebalanced easily. Also, it is evident that there is not much correlation of REITs with other bonds. People are investing in real assets rather than intangible ones like stocks or bonds. Furthermore, companies can accumulate wealth as they get income from their tenants regularly. There is not much volatility in portfolio. In terms of performance, REITs have done pretty well, since their foundation. In the past two decades, they have given higher returns as compared to bonds.