Just as mutual funds (MFs) allow you to invest in small amounts to acquire the shares of a diversified and professionally managed MF program, real estate investment trusts (REITs) also allow an investor to leverage real estate investments by investing small amounts without taking out a home loan at all.
Thus, a REIT allows real estate owners to pool income-generating assets in a portfolio and allows investors to acquire ownership of real estate assets in the form of equity. Investing through REITs also allows investors to take advantage of investing in publicly traded entities.
Just as MF portfolios are managed by professional fund managers to ensure investments are made in the stocks of fundamentally strong companies, REITs must ensure that at least 80 percent of the assets in their portfolios are completed and income-producing properties. A low development stage asset (20 percent or less) means less risk to cash flows.
To ensure cash flows for investors, REITs must distribute the majority of earnings to shareholders as distributions. For example, under regulations in India, REITs must pay up to 90 percent of distributable cash flows to investors.
After the first REIT was formed in the US in the 1960s, this alternative way of investing in real estate was accepted worldwide, with global REIT wealth reaching as high as $2 trillion.
REITs offer investors access to the benefits of real estate investing with the benefit of investing in publicly traded entities, as these are typically listed on the stock exchange through an initial public offering (IPO). Once listed on the stock exchange, they serve as permanent capital vehicles to raise debt and equity in the capital markets to acquire new assets for growth.
REITs are widely accepted by global institutions and individual investors as a product that offers: