Take your first step on the property ladder without the hassle of open homes. 🪜 Getting into the property market doesn’t require dipping into your KiwiSaver, chatting up the bank of mum and dad, or depleting your investing portfolio. Real Estate Investment Trusts (REITs) are a way for anyone to invest in real estate through property company shares without big upfront costs while enjoying some of the benefits of property ownership. Just like owning property, when a REIT generates income from rent, you receive dividends -  Ka-ching! So let’s delve a little deeper into investing in property minus the costly legal fees.

What are REITs?

REITs are holding companies that own, manage, acquire or finance real estate. When you invest in a REIT you're essentially buying a share of a pool of retail, commercial or industrial properties - anything from shopping malls, apartment buildings and hotels, to warehouses and data centres - or real estate products, such as mortgages. Like ETFs, REITs are another way to diversify your investment portfolio. 

According to Visual Capitalist, to qualify as a REIT in the US, holding companies must meet the following:

• Invest at least 75% of assets in real estate, cash or US Treasuries
• Derive at least 75% of gross income from rents, interest on mortgages, or property sales
• Pay at least 90% of income as dividends to shareholders
• Pay taxes
• Have a board of directors or trustees
• Gain at least 100 shareholders after one year of operations
• Have no more than half the REIT holding company shares held by five or fewer people

What is a REIT stock?

How do REITs go public? 🏦 REITs list on US share markets, including the NYSE and the Nasdaq, as well as global share markets and are available for anyone to buy and sell. In the US this, REITs go public through an initial-public offering (IPO). The money from shares sold on the open market is then used to buy assets such as malls, office buildings and hotels that ideally generate income for shareholders, or to buy cash assets. Money generated from an IPO can also be used for property development, to renovate retail and commercial properties, or to pay off debt, such as mortgages. 

REITs also aim to generate income through capital gains when property values go up, which helps REIT stocks to grow in value over time. REIT stocks are considered by some as stable for investors because properties owned by REITs are usually leased to tenants over the long term.

‘Real estate investment trusts are historically one of the best-performing asset classes. The FTSE NAREIT Equity REIT Index is what most investors use to gauge the performance of the US real estate market. As of June 2022, the index's 10-year average annual return was 8.34%.’ - Will Ashworth, Investopedia

According to Investopedia and Benzinga, there are 6 main categories of REITs, each with pros and cons. These are:

• Retail REITs - these include malls and freestanding retail properties. Around 24% of REITs are retail REITs; this subsector is under pressure as consumers move away from bricks and mortar shopping to online retail
• Residential REITs - these include apartment buildings and built communities; the highest value of these are in large urban centres like NYC and LA where there is always high demand
• Healthcare REITs - these own properties like hospitals, medical and nursing facilities and retirement properties
• Office REITs - many benefit from long term leases with their business tenants; some may have been affected by increased work from home policies by workplaces that have reduced the amount of office space they lease
• Mortgage REITs - around 10% of REITs invest in mortgages rather than actual physical properties
• Industrial REITs - these lease property such as warehouses, factory space and space for data centres - a category that some commentators have said may be poised to benefit from ‘the coming wave of AI-related demand for data centers’; this a turn-around from a year ago when Amazon was amid reducing their warehouse leases that totalled 36.418 million square metres by the end of 2022 and was buying their own properties

‘The share price of several industrial REITs declined more than 25% in the spring of 2022 after Amazon stated it would be cutting its logistics network costs due to an oversupply of warehouse space. This was interpreted by Wall Street to mean that Amazon will continue giving up its leased space.’ - Ethan Roberts, Benzinga

How do REITs make money?

Most REITs grow revenue through owning multiple rental properties. 🏘️ The majority of REITs make most of their money by owning and managing income-generating real estate properties, earning revenue from rent and long-term leases. REITs also generate income through profits they make from selling properties, as well as interest from home loans, or financing part of the real estate sector.

The world’s largest REITs

Nine of the 10 world’s largest REITs by market cap are listed on the NYSE, and one is listed on the ASX. Those on the New York Stock Exchange are: 

• Prologis (PLD) is an industrial REIT with a market cap of US$126.36 billion 
• American Tower (AMT) is a communications REIT that holds a market cap of US$87.23 billion
• Equinix (EQIX) is a data centre REIT with a market cap of US$80.38 billion 
• Simon Property Group (SPG) is a retail property REIT (malls) that holds a market cap of US$56.21 billion 
• Public Storage (PSA)is a self-storage commercial REIT that has a market cap of US$49.63 billion 
• Crown Castle (CCI) is a communications REIT with a market cap of US$46.93 billion 
• Realty Income (O) is a commercial property REIT with a market cap of US$43.53 billion 
• Digital Realty (DLR) is a data centre REIT that has a market cap of US$43.32 billion 
• VICI Properties (VICI) owns portfolios of gaming, hospitality, and entertainment destinations and holds a market cap of US$30.54 billion 

Best REITs for passive income

The majority portion of REIT revenue is shared with investors. 💰 Because REITs are required to pay 90% of their profits to shareholders as dividends each year, REIT shareholders receive dividends every quarter or twice a year. This rule helps REITs to maintain their special tax status. By distributing the majority of their earnings as dividends, REITs avoid paying corporate income tax, passing the taxable income to their investors instead. 

The 90% rate REITs are required to pay as dividends to shareholders in combination with rents and leases keeping up with inflation means dividends can increase over time.

‘REITs can provide a strong source of income for people who want a steady income each year. REITs can be ideal for retirees or people looking to supplement their current income from their primary job. Due to the diversified nature of many REITs by holding many different properties in various industries, REITs can be significantly more diversified than single stocks alone. This can help to absorb the volatility of your portfolio in turbulent times.’ - Christopher Walsh, MoneyHub

10 High yield REIT stocks

High dividend yield REITs are ranked according to a percentage formula. A dividend yield is calculated based on the dividend value divided by the share price. So, if a dividend yield is 5%, for every US$100 of a REIT stock you own, you may be paid an equivalent dividend of US$5. 

According to Sure Dividend, there are 9 REITs listed on the US share markets that they ranked as paying shareholders ‘super high’ dividends on 7 February this year - some paying more in dividends than blue chip company stocks. These are: 

• Office Properties Income Trust (OPI) owns, develops and leases office and mixed-use properties in the US and has a dividend yield of 27.8%
• Medical Properties Trust (MPW) invests in, owns, and leases healthcare real estate, and has a dividend yield of 18.6%
• Orchid Island Capital (ORC) is a finance company that specialises in investing in residential mortgage-backed securities, with a dividend yield of 17.5%
• Global Net Lease (GNL) owns around 1,300 commercial properties, including offices, retail and industrial properties in the US and Europe and has a dividend yield of 17.4%
• ARMOUR Residential REIT (ARR) invests exclusively in residential mortgage-backed securities that are issued or guaranteed by a US Government-sponsored entity and has a dividend yield of 15.2%
• AGNC Investment Corp (AGNC) provides private capital to the US residential housing market, which facilitates US home ownership, and pays a dividend yield of 15.2%
• KKR Real Estate Finance Trust (KREF) is a company that lends money for real estate projects, like building or buying properties, and makes money through the interest it charges on those loans dividend yield of 14.6%
• Ellington Financial (EFC) has a dividend yield of 14.6%
• Ares Commercial Real Estate (ACRE) is a real estate finance company with a dividend yield of 14.4%

‍Global Ranking tracks the top dividend-payers in real time with different results - which serves as a reminder to always do your research before you invest in any shares. Of their top 10 dividend yields in the world, eight are listed on the US share markets. These are:

• Equity Commonwealth (EQC) owns US office properties and holds a dividend yield of 27.8%
• Office Properties Income Trust (OPI) according to Global Ranking has a dividend yield of 19.89%
• Nexpoint Real Estate Finance Inc (NREF) specialises in commercial real estate properties and has an 18.87% dividend yield
• Orchid Island Capital (ORC) is another with a dividend yield that differs from Sure Dividend’s ranking with a dividend yield of 18.18%
• Great Ajax (AJX) is focussed on the financing of single-family residences and commercial properties and pays a dividend yield of 16.03%
• Global Net Lease (GNL) also differs from Sure Dividends’ ranking, paying a dividend yield of 14.32%
• KKR Real Estate Finance Trust (KREF) has a dividend yield of 13.64%, less than Sure Dividends’ calculation
• Ellington Financial (EFC) has a dividend yield of 13.51%, lower than Sure Dividends’ ranking

According to S&P Global, ‘nearly half of US REITs’ increased their dividends in 2023.

What are REIT ETFs?

Real Estate Investment Trust exchange traded funds (REIT ETFs) usually track the performance of a specific real estate index - like the MSCI US REIT Index and the Dow Jones US REIT Index - or a basket of REITs. REIT ETFs can be a simple way for investors to diversify their portfolio and invest in the real estate sector with just a single purchase. 

The two largest REIT ETFs are: 

• REIT Vanguard ETF (VNQ) has US$27 billion in assets and tracks the performance of the MSCI US REIT index, which is based on the MSCI USA Investable Market Index (IMI), which covers around 99% of the total US market and includes 123 REITs
• Schwab US REIT ETF (SCHH) with US$5 billion in assets and tracks the Dow Jones US Select REIT IndexTM, a subset of the Dow Jones US Select Real Estate Securities Index (RESI)

S&P REIT Index

Track how the real estate sector is performing. 🏙️ The S&P REIT Index is like a scoreboard where S&P Global tracks the performance of REITs. The index gives investors an idea of how the overall REIT market is doing by showing whether the combined value of these small, medium and large market cap real estate-focused companies is going up or down. It’s also an indicator of how the real estate sector is doing overall in the stock market.

The REIT index ticker list for S&P REITs includes:

• First Trust S&P REIT ETF (FRI) tracks the S&P United States REIT Index
• SP Funds S&P Global REIT Sharia ETF (SPRE) tracks REIT securities listed in developed and emerging markets of the S&P Global BMI Shariah Index

There are also REITs on the S&P 500, S&P 400 and the S&P 600, which you can find listed here.

Cannabis REITs 🌱

Cannabis REITs have become multibillion dollar investments. 🪴 This REIT subsector includes owned or managed properties that are used to grow, process, store and distribute medical marijuana and recreational-use cannabis. This can include anything from greenhouses to dispensaries. These REITs give investors the opportunity to invest in real estate and the cannabis industry in a single investment. 

Two listed on the US share markets include:

• Innovative Industrial Properties (IIPR) has a portfolio of 108 properties in 19 US states
• Chicago Atlantic Real Estate Finance (REFI) is comprised primarily of senior loans to state-licensed operators in the cannabis industry

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