REIT Real Estate Investment Trust Basic Understanding
Imlaak.com is taking a step forward in educating people about the advantages of REIT and encouraging them to invest. If you want to learn more about Real estate investment trusts and how you can make the best use of your investment while investing in them contact us for a free consultancy session.
REIT Real Estate Investment Trust Basic Understanding
Modeled after mutual funds, REIT is a company that owns, operates, manages and finances income producing real estate. Real Estate Investment Trust offers all investors, specially small ones to invest and benefit from income producing real estate. The first legislation for REIT was executed in US in 1960 by the than president Eisenhower and brought the benefits of commercial income producing real estate to ordinary and average citizens that has been only available to wealthy people previously.
Presently the model of REIT is being followed in more than 35 countries across the globe successfully.
How do REIT work
Real Estate Investment Trust allow individuals to invest in real estate in the same way as they would invest in any other industry as under:
- Through the purchase of company stock in stock market.
- Through a mutual fund or exchange traded fund (ETF).
Most Real Estate Investment Trusts work on a simple model where they own commercial or residential property and earn rentals on them. The Real Estate Investment Trust pays out 100% of the taxable income to its shareholders as per there holdings. In addition as the income increases the value of shares increase as well, thus besides dividends it offers an ever growing physical real estate asset which can be traded in stock exchange.
Simply put, it gathers a number of investors to formulate a company which is registered in SEC (Stock exchange commission) and regulated through it. Investors are allotted a number of shares against there investment where as the actual cash is used to buy a property which is usually impossible to purchase for any single unit holder because of the mere size.
This property produces income through rental and general price appreciation like any other property. The rents are divided among share holders monthly where as the increase in asset is represented by the increase in the stock price which can be sold off at any time in the stock market.
Types of REIT
In general there are three kinds of Real Estate Investment Trust as under :
- Rental REIT : A rental scheme invests in commercial, residential or industrial rental property to generate rental income for its investors.
- Development REIT : This type of REIT invests in development or refurbishment of commercial, residential or industrial property to achieve profits.
- Hybrid REIT : Hybrid scheme has the portfolio of both development and rental in its project.
Advantages of a REIT
In general Real Estate Investment Trust is very much like buying any other real estate asset with the purpose of generating rental incomes and asset appreciation. However it offers some distinct advantages as under :
- Diversification : You can invest in various projects of REIT to diversify your real estate and investment portfolio.
- Risk Eversion : REIT has little correlation with other kind of stocks and bonds thus offer a safe heaven for a safer risk free investment.
- Dividend Pay Out : REIT usually distributes 100% of its profit to the share holders, thus giving you the opportunity to earn a monthly regular stream of income. In case of rentals the pay outs are usually monthly, in development REIT these dividends are distributed during profit taking stages.
- Debt free : REIT is completely equity financed and debt free therefore safer and free from related cash flow distress and default risks.
- Transparency : It is regulated by SEC and follows the same rules and regulations applicable for other private listed companies.
- Liquidity : It is very easy to liquidate the stocks if need be.
- Convenient : You get to invest in real estate without doing all the hard work, it is merely a few clicks away as you just need to buy the shares in the stock market.
- Low barriers for entry : Absolutely any one can make an entry into a Real Estate Investment Trust and invest, no matter how much money you have you can start investing straight away.
REIT in USA
USA being pioneer in REIT system has been able to gain huge success. Presently all REIT’s combined hold more than $ 3 Trillion worth of assets, out of which more than $ 2 Trillion are listed in stock exchange. In addition more than 80 Million Americans invest in Real Estate Investment Trust stocks through their investment funds.
REIT in Pakistan
When it comes to Pakistan we do not enjoy a huge portfolio of RMC (REIT management companies) and the first rental investment trust was introduced by Arif habib group for Dolmen Mall Karachi in 2015. The initial regulatory framework for REIT by SECP were introduced in 2008 which were revised in 2010 and 2015 and than later on in 2018 so to encourage RMC (REIT Management company) to launch new REIT’s.
Imlaak.com is taking a step forward in educating people about the advantages of Real Estate Investment Trust and encouraging them to invest. If you want to learn more about Real estate investment trusts and how you can make the best use of your investment while investing in them contact us for a free consultancy session.
Captain (Retd) Shahnawaz Yaqub Bhatti
Investment Consultant and CEO at Imlaak
Mob : +92 333 1717170 ( WhatsApp)
