Real Estate Investment Trust – Definition

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Real Estate Investment Trust (REIT) Definition

Investments made in dividend paying fixed assets, specifically in real estate, are called ‘Real Estate Investment Trust (REIT)’. REITs raise capital through an Initial Public Offering (IPO), these funds are then used to buy and develop the estate, accumulate assets, and provide dividends by way of rents, leases, and sale of property. IPOs for REITs are governed by the same rules as other securities. The difference is in the underlying investment structure. REITs can be bought in units that offer ownership in a managed pool of real estate.

A Little More on What is a Real Estate Investment Trust (REIT)

REITs are traded on all major public exchanges and purchasing signifies ownership of shares in an investment entity. Owning a REIT implies ownership in a fraction of all the managed real estate properties. REITs differ from securities in that they’re like mutual funds and distribute profits as dividends directly back to investors.

How Do REITs Work?

REITs raise capital via IPOs, and share trading, providing investors indirect access to real estate properties. Public REITs are bought and sold on the stock markets while Private REITs seek individual or accredited investors via Private Prospectus Placements (PPMs).

All REITs must distribute 90% of their taxable profits as dividends back to investors, as per legal norms. Income is based on renting, leasing, property management fee, and selling developed properties.

Mortgage REITs make their income chiefly by way of interest and installments that borrowers pay on mortgaged properties and related debt products. They’re more like bond investments than regular real estate funds.

Advantages of REITs

REITs diversify investors portfolio and provide access to a host of real estate properties that offer rich returns on investments in the form of regular dividends. Investors do not have to deal with the operational overload of owning and developing real estate properties, this is managed by the trust. REITs are valuable liquid assets that can be sold off with ease in the equities market, unlike actual real estate. The underlying tangible assets like land, buildings, commercial estates and more make them very safe and non-volatile investments with guaranteed principal recovery in most eventualities. They grow at a slower rate than regular investment funds but are bankable and solid on returns.

References for Real Estate Investment Trust

Academic Research on  Real Estate Investment Trust

Real estate returns and the macroeconomy: some empirical evidence from real estate investment trust data, 1972-1991, McCue, T., & Kling, J. (1994). Journal of Real Estate Research, 9(3), 277-287. This paper examines empirical data from the years 1972 – 1991 to explore the relationship between Real Estate Investments Returns and the macroeconomy.

The response of real estate investment trust returns to macroeconomic shocks, Ewing, B. T., & Payne, J. E. (2005). Journal of Business Research, 58(3), 293-300. This journal explores the repercussions on the returns of REITs due to macroeconomic shocks.

The fractal structure of real estate investment trust returns: The search for evidence of market segmentation and nonlinear dependency, Ambrose, B. W., Ancel, E., & Griffiths, M. D. (1992). Real Estate Economics, 20(1), 25-54. This paper uses mathematical models to analyse the segmentation between the capital markets and REITs returns.

An investigation of the change in real estate investment trust betas, Khoo, T., Hartzell, D., & Hoesli, M. (1993). Real Estate Economics, 21(2), 107-130. This paper takes a look at the structural shift of REIT betas in the last 2 decades and examines the causes.

On the time‐series properties of real estate investment trust betas, Chiang, K. C., Lee, M. L., & Wisen, C. H. (2005). Real Estate Economics, 33(2), 381-396. This study uses a three-factor model to test the hypothesis of declining REIT betas from 1972 until 2002.

An empirical evaluation of the usefulness of non-GAAP accounting measures in the real estate investment trust industry, Fields, T. D., Rangan, S., & Thiagarajan, S. R. (1998). Review of Accounting Studies, 3(1-2), 103-130. This paper presents three sets of empirical analyses to test the hypothesis of the usefulness of non-GAAP (Generally Accepted Accounting Principles), accounting measures in evaluating REITs’ performance.

The pricing of real estate investment trust initial public offerings, Below, S., Zaman, M. A., & McIntosh, W. (1995). The Journal of Real Estate Finance and Economics, 11(1), 55-64. This paper takes a look at the pricing structure of REIT IPOs.

Conditional volatility of equity real estate investment trust returns: a pre-and post-1993 comparison, Jirasakuldech, B., Campbell, R. D., & Emekter, R. (2009). The Journal of Real Estate Finance and Economics, 38(2), 137-154. This paper presents a case study of the conditional volatility of REIT equities, for two durations before and after 1993 – when modern EREITs were introduced.

The performance of acquisitions in the real estate investment trust industry, Olgun, S. (2005). Journal of Real Estate Research, 27(3), 321-342. This paper takes a look at the impact of acquisitions on the REITs industry.

Real Estate Investment Trust, Dawson Jr, J. C. (1961). Tex. L. Rev., 40, 886. This articles takes a look at the structure of taxes levied at REITs.

Volatility clustering, leverage, size, or contagion effects: The fluctuations of Asian real estate investment trust returns, Tsai, I. C. (2013). Journal of Asian Economics, 27, 18-32. This paper takes a look at the volatility of REITs market in major Asian economies like South Korea, Japan, Hong Kong, Taiwan, Singapore, Thailand and Malaysia.

Information, uncertainty, and behavioral effects: Evidence from abnormal returns around real estate investment trust earnings announcements, Gyamfi-Yeboah, F., Ling, D. C., & Naranjo, A. (2012). Journal of International Money and Finance, 31(7), 1930-1952. This first of its kind study focuses on the drift anomaly of REITs post earnings announcements.

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