On the local front one would assume that government’s intention is to establish a REIT regulatory framework for income-producing commercial real estate assets
What are real estate investment trusts (REITs)?
REIT stands for Real Estate Investment Trust. You can find the definition of it by Googling as always, however I will try to explain about it in simple layman terms.
Let’s say in my country the Real Estate market is booming, Residential Housing is appreciating in value massively & rental incomes are also very high. Other than this, there are many new shops and businesses coming up & they are constructing and/or occupying swanky new buildings and skyscrapers to run their businesses, for which they are also paying rent handsomely. Now, this looks like a great opportunity for an average person like me to invest in & make handsome returns. But then comes the big problem…
The cost of a simple and good residential apartment is generally too large for an average salaried employee like me to afford. Hence I will need to take a home loan to purchase the house for which my monthly payment will have to be about 80% of my disposable monthly income and that too for a period of 20 years!!! Now, for a Commercial Complex, it would cost 10 times more than this… so overall, even though my returns would be massive, the initial investment I need to make are way beyond my reach. Hence it is difficult, if not impossible, for me to look to Real Estate as a feasible investment vehicle.
This is where REITs come to my help. Just like how Mutual Funds work, REITs are basically Real Estate Agencies which own several of these residential and commercial properties; they collect small amounts of money from a number of interested investors and offer them returns equivalent to the amount of money they have invested in them. So, as a simple example, if I subscribe to a REIT which has 100 investors, then I don’t need to take a huge loan and pay upto 80% of my disposable income each month – instead, I only need to make small monthly investments of 0.8% of my income (80% divided by 100 investors) and I will accordingly get 1% of the rental income from the REIT in the form of monthly dividend. Of course, I can increase this amount and get higher dividends as I wish to.
This is just a simple explanation of what a REIT is and how it works. In reality, there are more complex things to account for, such as how units are allocated, how much tax needs to be paid, and while exiting how much capital gains can be made, etc.