Who invests in REITs?
Individual investors of all ages, both in the U.S. and worldwide, invest in REITs directly or through REIT mutual funds. Other typical buyers of REITs are exchange traded funds, pension funds, endowments, foundations, insurance companies and bank trust departments.
Investors typically are attracted to REITs for their high levels of continuing current income and the opportunity for long-term growth. These are the basic characteristics of commercial real estate investment.
Today, a broad range of investors are using REITs to help achieve the investment goals of diversification, dividends, liquidity, performance and transparency.
Why should I invest in REITs?
REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks are likely to be somewhat less than the returns of higher risk, high-growth stocks and somewhat more than the returns of lower risk bonds.
REITs are required by law to distribute each year to their shareholders at least 90 percent of their taxable income. Thus, REITs tend to be among those companies paying the highest dividends. The dividends come primarily from the relatively stable and predictable stream of contractual rents paid by the tenants who occupy the REIT's properties. Because rental rates tend to rise during periods of inflation, REIT dividends tend to be protected from the long-term corrosive effect of rising prices.
The low correlation of listed REIT stock returns with the returns of other equities and fixed-income investments varies over time. Thus, including listed REITs in your investment program helps build a more diversified portfolio.
REITs historically offer investors:
- Income & Long-term Growth: REITs provide competitive long-term rates of return that complement the returns from other stocks and from bonds.
- High Dividend Yield: Significantly higher on average than other equities, the industry's dividend yields historically have produced a steady stream of income through a variety of market conditions.
- Liquidity: Shares of publicly traded REITs are readily converted into cash because they are traded on the major stock exchanges.
- Professional management: REIT managers are skilled, experienced real estate professionals.
- Oversight: Independent directors of the REIT, independent analysts, independent auditors, and the business and financial media monitor a publicly traded REIT's financial reporting on a regular basis. This scrutiny provides investors with a measure of protection and more than one barometer of the REIT's financial condition.
- Disclosure obligations: REITs whose securities are registered with the SEC are required to make regular SEC disclosures, including quarterly and yearly financial reports.
Is homeownership a substitute for investing in REITs?
A house is a consumption good, not an investment, particularly when financed with a sizeable mortgage. It does not produce current income, but rather requires regular mortgage interest, real estate tax and insurance payments, plus other occasional expenditures, to be properly maintained.
In contrast, REITs represent investment in commercial real estate, which generates continuing income flow from rents.
Additionally, an investment in a REIT represents an investment that is diversified across a range of real estate properties in a variety of geographic locations. By comparison, a home's investment risk is not diversified, but rather highly concentrated in a single location.
The low correlation of REIT returns with house price returns, combined with the historically attractive total returns of REITs, make it no surprise that REITs show up in the optimal portfolios designed for both homeowners and renters.
More Frequently Asked Questions About REITs: