6 Major Benefits of Investing in Real Estate Investment Trusts (REITs)

For some people, instead of investing directly by purchasing or constructing a property, one can invest in the real estate market through Real Estate Investment Trusts (REITs).

A Real Estate Investment Trust (REITs) is a regulated collective investment vehicle that enables one to contribute money’s worth as consideration for the acquisition of rights or interests in a trust that is divided into units with the intention of earning profits or income from real estate as beneficiaries of the trust.

One can actually invest in REITs with a lower sum compared to what is needed when purchasing a piece of property. REITs shares are traded on the major stock exchanges which makes them easy to buy and sell.

Types of REITs

There are three main types of REITs and they are:

Development Real Estate Investment Trusts:

It’s a type of REIT in which investors pool their capital together for the purposes of acquiring real estate with a view to undertaking development and construction projects and associated activities.

Income Real Estate Investment Trusts:

It’s a type of REIT in which the investors pool their capital for purposes of acquiring long-term income-generating real estate including housing, commercial, and other real estate.

Islamic Real Estate Investment Trusts:

This is a special type that only undertakes Shariah-compliant activities. A fund manager is needed to do a compliance test before making an investment in this type of REIT to ensure it is Shariah compliant.

After knowing the various types of REITs available, it is critical to know what benefits are you likely to get when investing in them. Some of the benefits are highlighted below:

1. Stable and Consistent Income Stream

Investors who choose I-REITs to gain the benefit of regular rental income, which guarantees a dependable and consistent income source. According to the Capital Market regulations, I-REITs must distribute at least 80% of their earnings to unit holders via dividends.

2. Flexible Asset Class

REITs are seen as an adaptable investment tool, allowing investors to tailor their portfolio of REITs to match the characteristics of the fund, the different segments of the Real Estate market, and their desired geographic exposure.

3. Diversification

Investing in a number of asset classes such as REITs, fixed-income securities, and equities helps to reduce risk when incorporated into a single investment, as it spreads the investment across diverse locations, sectors, platforms, and classes. Most REIT institutions often own physical assets such as land and buildings and mostly enter into long leases with their tenants. This makes REITs some of the most dependable investments on the market. Diversification creates the opportunity for the blended portfolio to earn higher returns while reducing the potential for negative or low returns.

4. Competitive Long-Term Returns

REITs provide robust and long-term yields. This makes them an ideal component of a successful and efficient portfolio. It is notable that the promise of competitive yields from REITs is yet to materialize in Kenya.

5. Liquidity

Selling a physical property requires investing both time and money in terms of commission, fees and taxes. Investing in REITs, on the other hand, offers greater liquidity, as investors can buy and sell units or shares of REITs at any time, particularly if they are publicly listed. This liquidity advantage is also applicable to Real Estate developers who are not in a hurry to completely liquidate their assets if they need some liquidity.

6. Access to new capital

REITs provide a method for pooling cash for investment in capital-intensive long-term income-producing Real Estate projects, supplement existing capital-raising routes such as debt and equity markets, and raising funds to capitalize on opportunities as they occur.

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