What is a
REIT?
A Real Estate Investment Trust, or REIT, is a
company that owns, and in most cases, operates
income-producing real estate. Some REITs finance
real estate. To be a REIT, a company must
distribute at least 90% of its taxable income to
shareholders annually in the form of dividends.
Types of REITs
There are approximately 200 publicly traded
REITs in the U.S. today, with assets totaling
more than $475 billion. The shares of these
companies are traded on major stock exchanges,
which sets them apart from traditional real
estate. Other REITs may be publicly-registered
but non-exchange traded or private companies.
REITs are classified in the following
categories:
- Equity REITs own and operate
income-producing real estate.
- Mortgage REITs lend money directly to
real estate owners and their operators, or
indirectly through acquisition of loans or
mortgage-backed securities.
- Hybrid REITs are companies that both own
properties and make loans to owners and
operators.
The Evolution of REITs
The U.S. Congress created REITs in 1960 to give
anyone and everyone the ability to invest in
large-scale commercial properties. The REIT
industry has grown dramatically in size and
importance since then, and during the last
decade in particular. Factors sparking increased
investor interest include:
- REITs—also known as real estate
stocks—have outperformed most other major
market benchmarks over three decades with
significantly less volatility.
- REITs operate commercial properties in
nearly every major metropolitan area across
the country and in several international
locations.
- In 2001, Standard & Poor’s recognized
the evolution and growth of the REIT
industry as a mainstream investment by
adding REITs to its major indexes, including
the S&P 500.
Dividends and
Diversification
Because REITs must pay out almost all of their
taxable income to shareholders, investors can
look to REITs for reliable and significant
dividends (typically four times higher than
those of other stocks, on average).
Analysis of historical data concluded that
the relatively low correlation between REITs and
other stocks and bonds makes them a powerful
diversification tool. In particular, Ibbotson
Associates found:
- REITs offer an attractive risk/reward
trade-off
- The correlation of REIT returns with
other investments has declined over the last
30 years
- REITs may boost return and/or reduce
risk when added to a diversified portfolio
Any investor can build greater long-term
wealth by combining homeownership and REIT
stocks as part of a diversified investment
portfolio.
REITs and Your 401(k)
Plan
Institutional investors (organizations such as
pension funds) routinely have included real
estate in their portfolios. Yet, the latest
study shows that only about 10% of the nation’s
401(k) plans even offer participants the
opportunity to invest in a real estate fund. In
view of real estate stocks’ record of providing
dividends and diversification, every retirement
plan participant should have the right to choose
REITs.
If your 401(k) plan doesn’t include a real
estate option, ask for one. Your first step may
be to talk with your company's benefits officer
and request a prospectus containing information
about the fees, expenses, and risks of investing
in a REIT. That individual is also likely to
serve as a liaison with your 401(k) provider.
Remind them that a well-constructed 401(k) plan
isn't possible without real estate.
Courtesy of National Association of
Real Estate Investment Trust. NAREIT does
not intend for this publication to be a
solicitation related to any particular company,
nor does it intend to provide investment advice
to investors. Nothing herein should be construed
to be an endorsement by NAREIT of any specific
company or its products. © Copyright 2003
National Association of Real Estate Investment
Trusts® NAREIT® is the exclusive registered
trademark of the National Association of Real
Estate Investment Trusts.
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