Real Estate Investment Trusts
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- New!Foreign funds in REITs: the logic fits?, by Neha Somani, 30th January, 2015
What are REITs?
Real estate investment trusts (REITs) emerged essentially as a tax concept under US tax law. REITs are said to have originated in the USA in 1960s - but esssentially, they owe existence to the IRS rule that grants tax immunity to the trust subject to certain conditions. The structuring of REITs flows from the mutual fund structure - ownership of real estate split into various "units", implying proportional beneficial interest of the assets of the trust. In other words, it will not be wrong to call a real estate mutual fund as a REIT.
Thus, a REIT offers equity-type units to the investors - the value of a REIT unit is a fraction of the value of the property/properties owned by the REIT. REITs are typically publicly quoted and traded, similar to the units of a mutual fund.
REITs are often classed into "equity-type" REITs and "mortgage-type REITs". The former own properties and the latter simply create mortgages on properties. The latter take loan-type exposures in properties and are very similar, at least economically, to commercial mortgage backed securities.
REITs across the world:
The concept of REITs has quickly spread across the world. A 2004 Ernst and Young report says that REIT legislation has been adopted in at least 19 countries across the world.
Framing REIT legislation essentially implies permitting real estate investing mutual funds, and laying down the relevant tax rules. By and large, countries have adopted the US-style rules which require a minimum dividend distribution by the REIT.
A 2005 Real Estate Market Outlook by Ernst and Young speaks of the imminent REIT boom. It predicts that by next year, the total value of non-US REIT assets could grow to USD 140 billion.
During the crisis period in 2008 and early 2009, REITs began bleeding in the USA and elsewhere in the world. This was obvious due to a meltdown in the property segment, the very cause of the crisis. However, in later part of 2009, REITs have started seeing investment opportunities in distressed commercial real esatte - there have been several IPOs of REITs in 2009.
More on REIT in light with new AIF Regulations, Click here.
Our resources on REITs
- Vinod Kothari's Presentation on REITs (January,2014)
- Guidance Note on Real Estate Transactions, by Vinod Kothari (September, 2012)
- More on REIT in light with the new AIF Regulations, click here
- A website on REITs, click here
- Another website on REITs
- E&Y comes with an annual report on REITs
- REITs in Asia (An article of 2002) by Jones Lang LaSalle
- UK press office article on global REITs
- National Association of REITs
- REITs capitalization
- Tax Treatments of REITs in various jurisdictions
- Vinod Kothari's write ups on CMBS and REITs