What do you need to know about REITs?
A real estate investment trust (REIT) is an investment fund-like entity that invests in real estate (mostly commercial properties such as office buildings or shopping centres, but also apartments) and pays out the majority of its income as dividends to shareholders.
REIT status is regulated by law and although regulations may differ from country to country, their most common features are a requirement to invest mainly in real estate, no shareholder concentration and the obligation to pay out a specified, significant portion of profit as dividends, which allows REITs to be exempt from corporate income tax.
In the U.S., REITs have been around since the 1960s, in Canada since the 1990s, in Japan since the early 21st century. REITs arrived in Europe in 1969, when relevant regulations were introduced in the Netherlands, with France, Germany and the United Kingdom following in the 2000s. Currently, REITs operate in about 60 countries, and Poland is working on relevant regulations.
Many REITs are exchange-listed, but there are also non-public REITs.
From 1997 to 2016, REITs were the second-best asset class on the American market in terms of returns, yielding over 9% (source: MFS Investment Management: REIT returns based on FTSE NAREIT All REITs Total Return Index).
In the four quarters from September 2015 to September 2016, American REITs paid out over USD 51 billion in dividends (source: National Association of Real Estate Investment Trusts).
Stronger rates of return are easier to achieve also thanks to low management fees, as compared to equity funds.
Popular, liquid instrument
In 2016, the capitalization of the 224 REITs operating in the U.S. exceeded USD 1 trillion (source: National Association of Real Estate Investment Trusts).
REITs are a source of diversification for investment portfolios.
REITs are an attractive proposal for retail investors, who gain access to the real estate market. Institutional investors as well as investment and pension funds also hold REITs in their portfolios.
REITs invest in income-producing real estate. Exempt from corporate income tax, they pay out a large part of their profit in the form of dividends. Because of this, in a low-interest-rate environment, REIT shares are an attractive alternative to deposits or bonds.
Poland currently does not have regulations governing REIT status. In October 2016, the Ministry of Finance published a draft bill on property lease market entities, i.e. REITs. The shape of this bill is currently being discussed.