REIT Investing 101

Real estate investment trusts (REITS) offer investors the chance to gain exposure to commercial real estate via liquid securities that effectively trade like regular common stocks.

In other words, REIT investing gives you the benefit of investing in real estate, but doing so in a way that preserves your liquidity. (It’s much easier to sell a stock than a house!) It also allows you to invest in commercial properties that you wouldn’t otherwise be able to invest in on your own.

Here are some observations on the role REITS can play in diversified goal-oriented investment portfolios.

What Is an REIT?

REITS are pooled investment vehicles that invest in commercial (not residential) real estate, such as office complexes, shopping malls, hotel chains and so on. REIT investing provides a degree of diversification that would be missing if one were to invest directly in single properties.

To qualify as a REIT, a company must meet certain eligibility tests, including the pass through of 90% or more of its total income to shareholders in the form of dividends, and at least 75% of its total investments comprised of real estate holdings. REITS trade on securities exchanges in the same way as common stocks, and are also accessible via mutual funds and exchange traded funds. REITS have a history in the U.S. going back to 1960, and also exist in a number of foreign locations including Great Britain, the Netherlands, Australia and Japan.

One of the attractions of REITS is that they come with a relatively high dividend payout. For example the iShares Real Estate 50 (RTY), an ETF comprised of the 50 largest U.S. REITS, has a dividend yield of 3.6% as compared to the 2.0% yield on the iShares S&P 500 (IVV) ETF.

REITS can be a good addition for portfolios with higher income needs, while at the same time offering opportunities for capital appreciation. It should be noted that REITS can be rather volatile, often exhibiting higher standard deviation (a common measure of investment risk) than blue chip common stocks.

How Do REITs Relate to the Stock Market?

Historically REITS have had low levels of correlation to broad equity indexes like the S&P 500. That has changed dramatically over the past several years, though, and the low correlation benefit is no longer as compelling as it once was.

Still, REITS are a distinct asset class and can be a useful addition to your overall allocation mix. Many investors include REITS in the “alternatives” section of their portfolios along with other non-traditional assets like commodities, master limited partnerships and preferred stocks.

Investing in Global REITs

There are many world markets for REITS, and a handful of funds and ETFs that offer exposure to non-U.S. securities. One of the distinctive features of global REITS is that they provide “pure play” exposure to a country or to a region, as compared to investing in regular equities in the same country or region. That’s because real estate is the ultimate local business, where assets and income all derive from the same geographical territory.

For example large German companies like Siemens or BASF sell their products and services all over the world. Investing in Siemens, therefore, doesn’t give you the same kind of concentrated country exposure that investing in German REITS would. (Of course this can work against you as well. The more concentrated your exposure, the higher your risk.)

REITS are not necessarily a “must have” asset class, but they do have advantages and can be worth taking a look at. If nothing else, they offer opportunities for yield in an income-challenged investment world.

Are you invested in REITS? Tell us what you think.