Real estate investment trusts offer direct exposure to RE markets which have a low correlation with other asset classes (stocks; bonds). Its diversification benefits helps building efficient portfolios and is nowadays a passive investment vehicle operating under the following constraints:
1. Ownership: There must be at least 100 different shareholders. No five or fewer shareholders can own more than 50% of the stock (enacted 1993).
2. Asset: 75% or more of the REIT’s total asset should be in real estate.
3. Income: REITs must derive 75% of their income from passive sources (rents;mortgages).
4. Distribution: 90% of the REIT’s annual taxable income must be distributed to shareholders as dividends each year.
1960’s: US Congress passed the Cigar Excise Tax Extension legislation which included the Real Estate Investment Trust Act (REIT Act) giving real estate investment trusts tax treatment similar to mutual funds, allowing small investors to have tax efficient ownership of real estate.
1990’s: REITs experienced a large increase in market cap through the 1986 tax reform act and 1993 look through provision act which essentially increased attractiveness, liquidity and triggered a fundamental shift of assets from private to public ownership both via IPOs and subsequent consolidating acquisitions eg: Kimco Realty trust IPO (1991) and Taubman centers IPO (1992). As a result the number of REIT’s more than doubled from 1990 to 1995 and by year end 1997, the equity REIT market valuation (equity only) topped $135 billion, up from a mere $5.6 billion in 1990.
Since the 1990’s REITs have developed in to becoming an essential source of passive income with dividends averaging 5% for equity REITS and 10.6% for mortgage REIT’s. As of 2021, at least 39 countries around the world have established REITs which have evolved and specialised in various sectors ranging from resorts to refrigerated storages.
American Tower Corp (AMT) ; Realty Income (O) ; Simon Property Group (SPG) ; Host Hotels & Resorts (HST) ; Digital Realty Trust (DLR) ; Essex Property Trust (ESS) ; Apollo Commercial Real Est. Finance Inc (ARI)
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