Like Mutual Funds (MFs) allow you to invest in small amounts to acquire the units of a diversified and professionally-managed MF scheme, the Real Estate Investment Trusts (REITs) also allow an investor to take advantage of the real estate investments by investing in small amounts, without even taking a home loan.
So, a REIT enables the owners of real estate to pool income generating assets together in a portfolio and allows investors to buy ownership in real estate assets in the form of equity. Investments through REITs also allow the investors to take the advantage of investing in publicly traded units.
Risk Management
Like MF portfolios are managed by professional fund managers to ensure that the investments are made in the stocks of the fundamentally strong companies, REITs must ensure at least 80 per cent of the assets in their portfolios are completed and income-producing real estate properties. A low level of assets in the development stage (20 per cent or less) means less risk to the cash flows.
Cash Flows
To ensure cash flows for the investors, REITs must pay out the majority of earnings as distribution to the unitholders. For example, as per the regulations in India, REITs are required to pay the investors as much as 90 per cent of the distributable cash flows.
High Growth
After the first REIT was established in the US in the 1960s, this alternative way of investments in real estate has been accepted globally with the global REIT assets touching as much as $2 trillion.
Liquidity
REITs give the investors access to the benefits of real estate investment with the advantage of investing in publicly traded units as they are typically listed on stock exchanges through an Initial Public Offering (IPO). Once listed, they serve as permanent capital vehicles to raise debt and equity in the capital markets to acquire new assets to grow.
Other Benefits
REITs are universally accepted by global institutions and individual investors as a product that provides:
- Liquidity
- Transparency
- Diversification
- Dividends
- Performance