Do you want to know what real estate investment trust is? Yes, I want to know what a real estate investment trust is.
Are you considering investing in a Nigerian Real Estate Investment Trust (REIT)? Then, you must be aware of the existing REITs in Nigeria and ensure they are handled by professional fund managers well-versed in the stock and real estate sectors.
Real estate investing has been defined as a profitable company that draws many investors due to its profitability over time.
Before the creation of real estate investment trusts, investors could only participate in real estate by acquiring properties or developing from the ground up, which was sometimes time-consuming.
However, the introduction of REITs has simplified real estate investing. You may now purchase any real estate shares on the stock market and reap the benefits of investment trusts.
This article will examine the Nigerian REITs, detailing their offerings alongside their market capitalizations and total assets. But first, let’s define what Real Estate Investment Trusts are.
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Now, let’s get started.
What Is A Real Estate Investment Trust
REITs hold or finance income-producing real estate in many sectors. These firms are called “REITs.”
They provide both open-end and closed-end funds and are considered one of the most efficient real estate management methods.
You may participate in the real estate market as an investor through REITs. This will allow you to avoid the responsibilities of buying and managing individual properties.
These investment trusts pool the funds of their investors to finance various real estate projects. As a result, its investors can own and manage portfolios of apartment complexes and other real estate assets.
Real estate investment trusts (REITs) in Nigeria are securities that may be bought and sold on the NSE or Nigerian Stock Exchange. These transactions take place through authorized stockbrokers.
The portfolio of assets owned by a REIT may contain apartment complexes, data centers, hospitals, hotels, office buildings and warehouses.
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What Are The TYPES OF Real Estate Investment Trust
Real estate investment trusts can often be classified into one of these three categories:
Equity REITs invest in, maintain ownership, and manage commercial and rental properties. The maximization of earnings through acquisition and management is their principal concern.
Most of an equity REIT’s earnings come from collecting rents rather than selling its buildings.
Mortgage REITs are not allowed to acquire, own, or manage their investment properties. They do this by using mortgages on various pieces of real estate.
However, even though these properties are used as collateral for the loans that the mortgage REIT invests in, the REIT does not have any ownership stake in the property.
Hybrid REITs are a form of real estate investment trust that invests in properties and mortgages to combine the investment methods of equity REITs and mortgage REITs.
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What Are The Benefits And Risks Of Real Estate Investment Trust
REITs provide a vehicle for including real estate in one’s investing portfolio. Furthermore, certain REITs may provide larger dividend yields than other investments.
However, there are inherent hazards, particularly with non-exchange listed REITs. Non-traded REITs are subject to additional risks since they are not listed on a stock exchange:
1. Instability: Non-traded REITs are illiquid assets. They are often difficult to sell on the open market. If you need to sell an asset fast to raise funds, shares of a non-traded REIT may not be an option.
2. Share Value Transparency: While the market price of a publicly traded REIT is easily available, determining the value of a non-traded REIT share might be tricky. Non-traded REITs normally do not issue a value per-share estimate until 18 months after the offering closes.
This might be years after you made your first investment. As a result, you may be unable to analyze the value and volatility of your non-traded REIT investment for an extended period.
3. Distributions May Be Paid Through Offering Proceeds and Borrowings: Investors may be drawn to non-traded REITs due to their higher dividend yields than publicly quoted REITs. Non-traded REITs, unlike publicly listed REITs, typically pay dividends in excess of their profits from operations.
They may employ offering revenues and borrowings to do this. This practice, uncommon among publicly-traded REITs, decreases the value of the shares and the cash available to the corporation to purchase further assets.
4. Conflicts of Interest: Non-traded REITs often engage outside management rather than their personnel. This may result in conflicts of interest with stockholders.
For example, the REIT may pay considerable fees to the external manager based on the amount of property acquired and assets managed. These financial incentives may not always be in the best interests of shareholders.
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What Are The Limitations Of Investing In I Real Estate Investment Trust
You should also be aware of the following REIT limitations:
1. Limited Options: Currently, India has just three REITs and one International REIT Fund of Funds. This severely limits the options available to investors.
2. Limited Liquidity: While REITs are listed and traded on stock exchanges, the number of market participants is modest, particularly among ordinary investors.
As a result, effectively selling REIT investments may be difficult, especially in an emergency. As a result, the investment has limited liquidity.
3. Taxable Dividend: Any dividend or interest paid through REITs is fully taxable in the investor’s hands at the appropriate slab rate. Those in the 30% tax bracket will thus pay a significant amount of their dividend income in taxes. Another significant factor to consider before investing in REITs is the tax restrictions.
What Are The Five Major Things To Consider Before Investing In Real Estate Investment Trust
The following are the five most important factors to consider:
1. DIFFERENTIATION
On the other hand, investing in a REIT allows you to indirectly acquire a range of real estate, including residential and commercial buildings.
Some property types, such as hotels and shopping centers, may no longer be accessible to private investors due to financial limitations. However, a REIT now makes it simpler to access them.
2. FLEXIBILITY
You may invest in REITs easily by looking at publicly accessible data and determining where to put your money.
Alternatively, you can hire an investment adviser to research for you. After that, you can acquire REITs through a brokerage business.
On the other hand, purchasing and maintaining actual homes requires activities such as selecting a real estate agent, inspecting houses, negotiating pricing, arranging finance, and so on.
3. LIVABILITY
It may take some time to locate a qualified buyer willing to pay the amount you want to sell your investment property, especially if the market is poor.
The market establishes the price at which REIT shares may be bought and sold. After selling your assets, you will receive the corresponding amount quickly.
4. PROPERTY MANAGEMENT
Unless you employ a property manager, physical real estate ownership necessitates self-management.
Dealing with renters and maintaining the property may require significant time. Investors in real estate investment trusts (REITs) outsource these responsibilities to a team of experts.
5. MANAGEMENT
In the case of REITs, you give up power in exchange for specialists managing your assets.
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How Do Real Estate Investment Trusts Work
In 1960, Congress established real estate investment trusts to allow ordinary investors to buy equity shares in large-scale real estate corporations in the same manner that they could own stakes in other businesses.
This change made it simpler for investors to acquire and exchange a diverse real-estate portfolio.
The IRS requires REITs to satisfy specific conditions, including the following:
1. return at least 90% of taxable revenue as shareholder dividends each year. This is a significant appeal for REIT investors.
2. Put at least 75 per cent of your wealth into liquid assets like money or property.
3. Earn at least 75% of your gross revenue from real estate, such as rentals, interest on mortgages financing the real estate, or sales of real estate.
4. Have at least 100 stockholders after the first year of operation.
5. Have no more than 50% of your shares held by five or fewer people throughout the second half of the fiscal year.
6. By following these standards, REITs avoid paying corporation tax, allowing them to finance real estate more cheaply — and make more profit to distribute to investors — than non-REIT firms. This means that REITs can expand in size and pay out higher dividends over time.
Who Should Invest In Real Estate Investment Trust
REITs are one of the most expensive investment options since they own and manage high-value real estate holdings.
As a result, investors who park their money in REITs are individuals who have a lot of money to spare.
Large institutional investors, such as insurance companies, endowments, bank trust departments, pension funds, and so on, can invest in these financial instruments.
1. REITs’ Role in a Retirement Portfolio
Including REITs in one’s retirement portfolio can benefit investments in various ways.
2. Subject portfolio to a varied range of properties
By integrating real estate, one may diversify their asset classes without managing them directly. Furthermore, with diversification, the price fluctuations of other investment alternatives would have little effect on REITs. Rather, in a sinking market, the value of REITs does not collapse as quickly as equities.
3. Possibility of making money
When the value of a REIT rises, investors often make big returns. Furthermore, these businesses are obligated to distribute up to 90% of their taxable revenues to their owners, providing a constant source of income.
4. Suitable for long-term use
Unlike equities and bonds with a 6-year economic cycle, REITs move in lockstep with the real estate market.
Notably, such activity tends to endure for over a decade, making it ideal for investors seeking a long-term investment horizon. As a result, it is a beneficial investment route for retirement planning.
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Final Thought
Now that we have established what real estate investment trust is, REITs are an excellent alternative if you want to invest in real estate but don’t want to deal with the burden of purchasing or maintaining a property.
They provide both significant dividend yields and modest, long-term capital growth, and rentals paid by tenants earn their dividends.
When you buy a REIT, you join a wider group of individuals who own income-generating real estate, which is everyone’s desire.