REIT’s or Real Estate Investment Trusts

REITs are pools of properties and mortgages that bundled together as tradable securities in the form of unit investment trusts. Each of the units in a REIT represents a “proportionate fraction of ownership”. REIT’s and their integrated unit investment trusts represent around 10% of investment within the financial sector.

A REIT is a security that is traded in the same way as stocks on major indices. REIT’s invest in “direct” real estate through properties and mortgages and are required to pay out “at least 90%” of incomes.  REITs are more “Value” than growth orientated and are typically composed of small and mid-cap holdings.

The attractions of REIT’s are:

• Tax benefits
• High Yields
• Liquidity
• Stability

There are three main categories of REIT:

Equity REIT’s own and invest in individual properties which create revenues from rental income. The Equity REIT is responsible for the equity of their real estate assets.

Mortgage REIT’s are investment vehicle that trade and hold investment in and ownership of property mortgages. Mortgage REIT’s can loan funds in the form of mortgages to real estate owners or purchase existing mortgages and mortgage backed securities. Revenues are generated by accruing interest that is earned on mortgage loans.

Hybrid REIT’s are a calculated combination of Equity and Mortgage REIT’s

According to Investopedia

Investopedia explains Real Estate Investment Trust - REIT

Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. An additional benefit to investing in REITs is the fact that many are accompanied by dividend reinvestment plans (DRIPs). Among other things, REITs invest in shopping malls, office buildings, apartments, warehouses and hotels. Some REITs will invest specifically in one area of real estate - shopping malls, for example - or in one specific region, state or count

Aside from the improved liquidity, REIT’s are very similar to Real Estate Funds and they saw immense growth during the boom years.

This led to a secondary market called “NON-LISTED REITs” or “UNLISTED REITs” or “NON-TRADED REITs” which has now come under great scrutiny amongst speculation of:

• Excessive broker fees
• Illiquidity
• Opaque disclosures
• Valuation issues

The highly traded REIT market has recently been caught up in the financial crisis due to its intricate involvement with the property and mortgage sectors. In our opinion, buying into existing REITs at this moment in time is only for the very knowledgeable and experienced investor – or the fool hardy.

REITs most definitely have a place in the future of investment portfolios but probably not until the banking sector has cleaned up its act.

Well-known institutions are currently being questioned about non-traded REITs include:

Merrill Lynch, Citigroup, Smith Barney, UBS, Morgan Keegan, Morgan Stanley, LPL, Linsco