What is the history of REITs?
Congress established REITs in 1960 to allow individual investors to invest in large-scale, income-producing real estate. REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.
The first REIT was American Realty Trust founded by Thomas J. Broyhill, cousin of Virginia U.S. Congressman Joel Broyhill in 1961 who pushed for the creation under Eisenhower. As of 2021, at least 39 countries around the world have established REITs.
Leading REITs worldwide 2024, by market cap
Prologis, American Tower, and Welltower were the real estate investment trusts (REITs) worldwide with the largest market caps as of April 11, 2024. All three REITs were headquartered in the United States.
The strong finish kept domestic REITs in line with the broader markets in 2008. The S&P 500 dropped 37 percent for the year, while the NASDAQ Composite fell 40.54 percent. The Russell 2000 was down 33.79 percent, and the Dow Jones Industrial finished 2008 down 33.84 percent.
Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.
Buffet and REITs
However, Berkshire sold its holdings of STORE Capital in 2022 after the company announced it was being acquired by two outside investment funds. Since then, filings have shown that Berkshire Hathaway has not owned shares of any other REIT.
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Sam Zell was the forefather of the modern real estate investment trust, or REIT.
| Symbol | Company | REIT performance (1-year total return) |
|---|---|---|
| SLG | SL Green Realty Corp. | 134.96% |
| DHC | Diversified Healthcare Trust | 113.82% |
| UNIT | Uniti Group Inc. | 103.15% |
| VNO | Vornado Realty Trust | 81.76% |
The first REIT was the American Real Estate Investment Trust, also known as American Realty Trust, established in the U.S. in 1960. The trust followed the passage of the Real Estate Investment Trust Act of 1960, part of the Cigar Excise Tax Extension of 1960, which was signed into law by President Dwight D. Eisenhower.
What is the problem with REITs?
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.
Undoubtedly, rising interest rates pose challenges for REITs. All else being equal, higher interest rates tend to decrease the value of properties and increase REIT borrowing costs.
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
The trend started to reverse in late 2023, with the REITs posting a 17.9% return for the fourth quarter. And it will likely continue in 2024 as multiple factors converge to create a favorable environment for the sector, according to REIT fund managers.
- Dividend Taxes. REIT dividends can be a great source of passive income, but the money you receive is subject to your ordinary income tax rate, which will depend on your tax bracket. ...
- Interest Rate Risk. ...
- Market Volatility. ...
- You Have Little Control. ...
- Some Charge High Fees.
However, he knows it doesn't make sense for him to get into the business of being a landlord. Buying and managing real estate is more of a business than it is an investment, and Buffett knows that his time is better spent choosing companies to invest in than it is running a real estate business.
The five largest REITs in the United States in 2021 are: American Tower Corporation, Prologis, Crown Castle International, Simon Property Group and Weyerhaeuser.
Key Takeaways. A REIT is a company that owns, operates, or finances income-producing properties. REITs generate a steady income stream for investors but offer little capital appreciation. Most REITs are publicly traded like stocks, which makes them highly liquid, unlike real estate investments.
U.S. investors, however, were historically neutral, or even negatively biased, against the REIT entity due to the loss of pass-through losses and taxation at the highest tax rates.
What is the REIT 10 year rule?
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
"Both public and non-public REIT investments should be considered long-term, and that could mean different things to different folks, but in general, investors who typically invest in REITs look to hold them for a minimum of three years, and some of them could hold them for 10+ years," Jhangiani explained.
According to new research from Nareit, the association representing publicly traded real estate companies, 168 million Americans, roughly 50% of all U.S. households, have some exposure to public REITs. That ownership comes in direct stock ownership or through mutual funds, ETFs or target date funds that include REITs.
| # | Name | M. Cap |
|---|---|---|
| 1 | Prologis 1PLD | $95.27 B |
| 2 | American Tower 2AMT | $80.74 B |
| 3 | Equinix 3EQIX | $69.99 B |
| 4 | Welltower 4WELL | $55.45 B |
REIT Benefits to Investors
This tax break results in a regular distribution of dividend income to REIT shareholders, and the effective net yields are often higher than the ones from bonds (or stocks), even in cases of high-interest rates.
