REITs, or real estate investment trusts, are companies that own or finance income-producing real estate property. “Modeled after mutual funds, REITs pool the capital of numerous investors,” Investopedia explains, “making it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.”
How do REITs work?
Property owners lease space, generating income that is paid out to shareholders in the form of dividends. By law, in fact, REITs are required to pay out at least 90% of their taxable income to shareholders (who must themselves then pay individual income tax on the dividends they receive).
How big is the REIT market?
It’s estimated that REITs own more than $3.5 trillion in gross assets across the U.S., representing more than 500,000 properties. In addition to these, mortgage REITs, which finance real estate properties rather than owning them, help finance almost 3 million U.S homes.
What types of property are owned by REITs?
REITs invest in a wide scope of real estate property types. The Sheaff Brock REIT portfolio strategy, for example, diversifies across sectors in order to generate current income along with the potential for long term capital appreciation.
In general, REIT properties may include:
- shopping malls
- office buildings
- apartment buildings
- medical facilities
- data centers
- cell towers
- infrastructures (bridges and toll roads, for example)
Most REITs focus on a particular property type, but some hold multiple types of properties in their portfolios.
Effects of the pandemic on REITs
The changes the pandemic have brought about in our everyday lives are having—and are likely to continue to have—an effect on commercial real estate, thus affecting REITs. With so many people ordering groceries, electronics, clothing, and supplies online, for example, there has been a decline in the need for shopping centers. Needless to say, with so many employees furloughed or working from home, the need for office space has lessened. Factory closings, along with the shutting down of hotels and movie theatres, affected shopping malls along with manufacturing sites. Social distancing requirements have led to many buildings sitting all but empty. Ironically, the law requiring REITS to distribute at least 90% of their income to investors through dividends hasn’t gone away. Even as owners of commercial real estate properties are absorbing all the economic hardships brought on by the pandemic, they must still comply with those distribution requirements.
REITs remain resilient
Meanwhile, many REIT managers have themselves proven resilient, lengthening the maturities of their debt in order to “buy time” while the economy recovers. As the vaccine is administered to more and more people, allowing business and recreational travel along with elective healthcare procedures to pick up steam, many REITs could be well positioned for a recovery.
In short, the “new realities” of real estate investing might well bring about new opportunities along with all the challenges.