A real estate investment trust (REIT) is a trust that generates returns through owning, operating or financing income-producing real estate. It is modeled in the same way as the mutual funds work. It gives a chance to own valuable property and earn dividend-based income and total returns. REITs own real estate such as office, apartment buildings, warehouses, hospitals, shopping centers, hotels, etc.
REITs allow a non-specialist to invest in a portfolio of real estate assets in the same way as he or she might have invested in other industries â either by purchasing individual company stock or by investing in a mutual fund or exchange-traded fund (ETF). REITs allow its unitholders to earn income without going out and buying, managing or financing the property.
REITs can be public traded over the exchange, or it can be private. The statistics used to assess the financial position and operation of a REIT are:
- Net asset value (NAV) representing the net value of a REIT, is calculated as the total value of the REITâs assets minus the total value of its liabilities
- Funds from operations (FFO), used by REITs to determine the cash flow from their operations, and,
- Adjusted funds from operations (AFFO), is a measure to assess the financial performance of the REIT.
REITs also allows its investors to earn rental yields on a pre-tax basis by investing in large commercial properties.
Listed REITs in Australia are called Australian Real Estate Investment Trusts (A-REITs). The General Property Trust (GPT) was the first REIT which got listed on the ASX All Ordinaries Index in 1971, and today they are 47 years old. By the mid-90s, the index recorded the market cap of A$7 billion. In the late 1990s, there was a boom in the market, and by 2002 the market cap reached A$43 billion. In 2007, the number of REITs went up to 69, and in 2012 the index recorded a market cap around A$90 billion.
It usually attracts those investors who are willing to earn a regular and consistent income stream by diversifying their investment portfolio into real estate. A fund manager is appointed by REIT who identifies, select, administrator, maintains, and is responsible for managing the rent of the property.
Each A-REIT has distinct characteristic as the properties selected are diversified across regions, tenant types, and lease lengths.
The company must have the following to be qualified as a REIT:
- The company must invest at least 75% in real estate generating a minimum of 75% gross income through the sale of property, rents, or interest on mortgages financing the property.
- A company must pay around 90 percent of the taxable income as a dividend to its unitholders every year.
- It should be a taxable entity being managed by a Board of Directors or trustees.
- A minimum of 100 shareholders with not less than 50% interest held by five or fewer individuals.
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