What is a REIT？
A real estate investment trust (REIT) is an investment fund that invests in income-generating real estate properties across a range of property sectors. The fund is operated and owned by a company of shareholders who contribute money to invest in office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and hospitals. Unlike other real estate companies, a REIT does not develop real estate properties to resell them. Instead, a REIT buys and develops properties primarily to operate them as part of its own investment portfolio. Many investors decide to add REITs to their portfolios because these products combine the ease and liquidity of investing in stocks with the opportunity to own, and profit from, real estate. Geared to generating income, REITs offer regular returns and outsized dividends.
What are the types of REITs?
All REITs are oriented toward producing income, but they do so in different ways. In total, there are three types.
- Equity REIT. An Equity REIT owns and operates real estate properties. Its revenues are generated in the form of rents, but it also offers the potential for capital appreciation from building sales.
- Mortgage REIT (mREIT). The earnings of mortgage REIT are generated from mortgages through lending money to real estate owners or buying existing mortgage-backed securities. The earning income from the interest on these investments.
- Hybrid REIT. As the name suggests, hybrid REITs use a mix of investing strategies, owning both actual properties and mortgages.
Why invest in REITs?
REITs historically have delivered competitive total returns because they can offer a strong, stable annual dividend and the potential for long-term capital appreciation. Meanwhile, REITs are easy to buy and sell, as most trade on public exchanges- a feature that mitigates some of the traditional drawbacks of real estate. Also, a REIT presence can be good for a portfolio because it provides diversification and dividend-based income, and the dividends are often higher than you can achieve with other investments.
What are the risks of investing in REITs?
Even REITs don’t necessarily correlate to what’s going on in the stock market, they can be just as volatile as stocks, and they’re vulnerable to economic conditions. For instance, office buildings may be threatened as more companies opt to expand their remote workforce. In addition, REITs are generally very sensitive to interest rate fluctuations, especially those that invest in mortgages. In a rising interest rate environment, Treasury bonds tend to become more attractive, which draws funds away from REITs and lowers their share prices.
How to invest in REITs？
Investors have many ways to invest in REITs. Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session, so the easiest way is to buy shares of publicly traded REITs through a brokerage account. Another way to invest broadly across the REIT sector is to buy a mutual fund or ETF focused on REITs, and they are also easy to buy and relatively inexpensive to purchase.
REITs investing in Saudi Arabia
REITs were introduced in the Saudi Arabia market in 2016 when the first REIT was listed on Tadawul’s Main Market. Since then 17 REITs came to the market raising over SAR 6.39 billion in the capital. The introduction of REITs is expected to play a fundamental role in transforming the property sector with institutional investors playing an increasingly important role in the market and also leading to the availability of larger investment-grade property assets.
REITs can invest locally, regionally, and globally, where the total asset value outside the Kingdom shall not exceed 25% of the fund’s total asset value. In addition, REITs are required to distribute at least 90% of the fund’s net profits to the unit holders annually (minimum) and therefore provide in principle a conditional income. Similar to other investment vehicles, REITs adhere to the rules and regulations issued by the CMA, and they also abide by the high standards of transparency and disclosure that are already applied in the current equity market.
Summary:
- A real estate investment trust (REIT) is an investment fund that invests in income-generating real estate properties across a range of property sectors.
- All REITs are oriented toward producing income, but they do so in different ways. In total, there are three types: Equity REIT, Mortgage REIT, and Hybrid REIT.
- A REIT presence can be good for a portfolio because it provides diversification and dividend-based income, and the dividends are often higher than you can achieve with other investments.
- Even REITs don’t necessarily correlate to what’s going on in the stock market, they can be just as volatile as stocks, and they’re vulnerable to economic conditions.
- Many REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session, so the easiest way is to buy shares of publicly traded REITs through a brokerage account.
- REITs were introduced in the Saudi market in 2016 when the first REIT was listed on Tadawul’s Main Market.
