Real estate investing can sometimes be very demanding. These demands more often than not make several investors reconsider investing in real estate, believing they are not ready. Some other investors are often scared off by the financial demands of buying and developing. Owning and management are a challenge for other investors. These reasons may seem valid but should not hinder your real estate investment plans. A real estate investment trust is an option to consider if you are anyone of these investors.
What is a real estate investment trust?
A real estate investment trust (REIT) is an investment fund or security that invests in income-generating real estate properties. The fund is operated and owned by a company of shareholders who contribute money to invest in commercial properties, such as office and apartment buildings, warehouses, hospitals, shopping centres and hotels. A real estate investment trust receives special tax considerations, offers high returns for investors, and publicly traded on a stock exchange.
The investors in REITs are the shareholders. They invest in the company by buying the shares or units of the company with the expectation of receiving dividend as profit.
Equity REIT and mortgage REIT are the two principal types of Real estate investment trusts. The former invests in real assets and properties while the latter do not own properties but invest in mortgages. The Mortage REIT earn income in the form of the interest payable on the mortgages in their portfolio. The equity REITs earn income from the rents collected from commercial properties like shopping malls and hotels.
Several investors reading this article may ask, are there REITs in Nigeria? Well the answer is yes there are REITs in Nigeria but because they are not popular investors tend to think they are non-existent. UPDC Real Estate Investment Trust, Sky Shelter Fund and Union Homes Real Estate Investment Trust are the three primary Real Estate Investment Trusts in Nigeria. UPDC is the largest of the REITs by asset, having an asset value of N33.2 billion as at June 28th 2019, followed by Union Homes’ N9.9 billion and then Sky Shelter’s N2.4 billion.
What are the benefits of real estate investment trusts?
1. Property Management Without Headaches: REITs provides investors with the opportunity to own commercial real estate. The benefits of REITs is endless, one of which is the benefit of having experienced property managers work to make money for them without the headaches of average landlords. Rent collection, tenant management, and facilities maintenance are all handled by a carefully selected management team.
2. Returns Through Dividends: REITs disburse a percentage of the profit to investors, unlike equity stock where management decides whether to pay dividends or reinvest profits back into the company. Investors have the power to decide what to do with their bonuses. REITs provide an opportunity for increased dividends as rents increase. Through the increased value of the property in the trust, appreciation would also be realized.
3. Returns Through Appreciation: REITs perform well due to the steady long-term appreciation of commercial real estate. Short-term fluctuations in inflation and interest rates do not usually impact commercial real estate and REIT share prices as much as they do equity stocks. Bond investments can provide reasonable returns with acceptable risk, but most bond classes have fixed values with no opportunity for appreciation.
4. Diversification: New investors have the opportunity to diversify their property portfolio. Because of the financial requirements of real estate investment, new investors can only invest in a few places. Therefore, exposed to the risks and returns of those micro-markets.
However, with real estate investment trust, these risks are reduced and diversified because these trusts own a wide variety of properties. They own offices, shopping malls, hotels and also they own properties in various markets, in turn, protecting themselves from the risk of the micro-market