Real estate investment trust (REIT)

    A real estate investment trust (REIT) is a type of highly liquid security used to invest in real estate. It is traded on the stock exchanges.

    They are usually structured like mutual funds enabling investors to purchase shares in it.

    REITs are usually used by corporations to invest in real estate, either through purchasing property directly or taking out mortgages, as they have tax advantages. It is possible for individual traders to purchase REIT securities.

    Trading REITs

    REITs are popular with traders because they offer high yields – typically a REIT must return around 90% of its taxable income to its investors as dividends, although this may vary depending on the country where the REIT is registered.

    Individual traders can buy REIT shares directly on an exchange that offers them for trading, or by investing in shares of a designated mutual fund set up for property investment, usually office or retail real estate, apartment blocks or shopping malls, or developments that consist of a mix of these.

    There are a number of different types of REITs. Equity REITs buy their own properties or land and derive their income from rents and leasing. Mortgage REITs invest in property by offering mortgages to property owners or purchasers. They may also buy up mortgages from other companies or mortgage-backed securities. They derive their income from the interest generated on the loans. Lastly, hybrid REITs invest in both mortgages and property, deriving their income from a mix of these.

    Traders interested in investing in REITs should examine a fund’s property portfolio, distribution of dividends, net asset value and funds from operations.

    Currently, traders should invest with caution – the global recession that began in 2007-08 was triggered by the U.S.’s subprime mortgage scandal. This spread to the banking sector and saw many financial institutions collapse. The property development sector was hit hard – many such companies were removed from indices such as the Fortune 500.

    Conversely, investors planning to invest in the long term will find REITs currently (in 2012) trading at very favourable prices that should yield strong returns when the property development market eventually improves again.