Investor Corner/The asset classes/Real Assets: REITs, InvITs and Gold
2.5.1 REITs: Real Estate Investment Trusts
REITs, or Real Estate Investment Trusts, own and operate income-generating real estate such as offices, malls and warehouses. Investors buy units similar to a mutual fund and receive rental income plus potential capital appreciation.
Real estate, structured like a security
A REIT pools capital to own and manage a portfolio of commercial properties, then distributes most of the rental income it collects back to unit holders on a regular basis. Units trade on the stock exchange, giving investors a liquidity that owning physical property directly simply does not offer.
Why the payout requirement matters
Regulation requires REITs to distribute a large majority of their distributable cash flow to unit holders, which is what makes them attractive to income-focused investors. This structural requirement is also why REITs tend to behave more like an income-generating asset than a pure growth one, with returns coming substantially from distributions rather than only from price appreciation.
What still moves their price
REIT unit prices are sensitive to interest rates, since rising rates make their yield less attractive relative to safer alternatives, and to the health of the specific commercial property segments they hold, such as office occupancy trends. They are a genuine diversifier away from pure equity and debt, but they carry their own distinct set of risks worth understanding.
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