REIT 101: Understanding this investment vehicle


By Michael Orzano, Director, Global Stock Indices
Publicly traded real estate stocks, including real estate investment trusts (or REITs) and real estate operating companies (or REOCs), provide investors with exposure to real estate, which is generally an asset class illiquid, without sacrificing the liquidity advantages of listed shares. They also typically offer higher returns than other stocks, can serve as an effective hedge against inflation, and could help diversify a portfolio made up of other asset classes. In addition, index products, such as REIT benchmarks and ETFs that track real estate, can provide a cost effective way to access a diverse portfolio of real estate REITs and stocks.

WHAT IS A REIT?

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A REIT is a corporation that owns and in most cases operates income producing real estate. These investment vehicles were designed to provide a structure for real estate similar to the structure that mutual funds provide for investing in stocks. REITs were originally created in the United States through the Real Estate Investment Trust Act of 1960, and they were intended to provide individual investors with access to a diversified portfolio of commercial real estate, an asset class previously only accessible to large institutional investors. Through REITs, investors can buy large office buildings, shopping malls, hotels, apartment buildings and other forms of commercial real estate.

The National Association of Real Estate Investment Trusts (NAREIT) defines a REIT as “a company that owns or finances income producing real estate” (IYR). A REIT follows a model derived from mutual funds. It acts as an investment vehicle for investors giving them the opportunity to invest in large scale property portfolios by purchasing stocks. REITs (VNQ), like securities (VTI) (VOO), offer investors the benefits of both long-term capital appreciation and dividends.

REITs (RWRs) have carved out a place for themselves in today’s market. As you saw above, REITs are associated with multiple economic aspects, including apartments, hospitals, hotels, industrial facilities, and infrastructure. According to a report by Ernst and Young, REIT-owned properties are estimated to have around 1.8 million jobs per year.

REITs have recently become a hot topic again. After closing on August 31, 2016, REITs shares and other listed real estate companies were reclassified in the new real estate sector. The transfer took place in the financial sector of the Global Industry Classification Standard or GICS, due to the growing importance of the housing market and the real estate sector.

In this series, we will discuss the strengths of investing in the REIT industry, the current market landscape, and the benefits you can expect from this type of investing.


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