Introduction
To be a successful investor, it’s important to have a well-thought-out strategy that involves carefully selecting a diverse range of investments to form a well-balanced portfolio. This portfolio should be designed to provide optimal returns and set you up for long-term success. Maintaining a sophisticated portfolio requires careful planning and attention to detail. Diversification is the name of the game here – you’ll want to be splitting up your financing across a range of different asset classes so that you aren’t reliant on one particular asset type that may make or break your portfolio.
It’s not enough to just buy individual stocks or bonds and call it a day. It’s crucial to consider how these assets fit together as well as how they compare with other investments in the market. When it comes to alternative asset classes, real estate reigns supreme and has been a consistently strong performer over time. It is mostly uncorrelated with traditional stocks and the like, yet provides diversification where it is so desperately needed.
But, in order to truly unlock the power of real estate, you have to be in the market, on the ground, doing big deals which may not always be accessible to everyone. And so, the concept of the REIT was born.
What is a REIT?
A REIT, or Real Estate Investment Trust, is an investment vehicle that exposes you to real estate without having to be involved in the individual deals yourself. These companies make their money through investments in income-generating real estate, and so when you buy shares in them, you essentially become a co-investor.
There are a number of laws in place that ensure that this is the case. These differ depending on the region, but generally:
- REITs must earn at least 75% of their gross income from real estate;
- REITs must invest at least 75% of their assets in real estate; and
- REITs must distribute at least 90% of their income from these investments to the shareholders.
Typically, there are two types:
- Public REITs…
In jargon terms: Their open nature means that their value is quite diluted and the quality of your real estate exposure is not as good.
In Layman’s terms: Their value is not as high because they are not exclusive, therefore the quality of your investment in it may not be as good.
- Private REITs tend to be more expensive, but they offer higher-quality exposure in return.
Both types are powerful instruments, albeit for different use cases. If you’re an investor looking to add rental properties to your portfolio, you can do so by purchasing shares in a REIT on a traditional investment platform, quickly and easily. It’s worth noting that REITs have completely democratized real estate investing – truly a game changer.
Why invest in REITs?
There are a number of reasons why you should add REITs to your arsenal:
Mitigate real estate risk
When you invest directly in a single piece of real estate, you are taking on a lot of risks because you are tying up a lot of money in one property and have little control over what happens to it. A REIT, on the other hand, gives you indirect ownership in a variety of properties, which spreads out the risk and makes it more manageable. Stake offers a similar type of diversification, but with the added benefit of allowing you to choose which properties you want to invest in, rather than having that decision made for you.
Lower investment requirement
Investing directly in real estate often requires a large amount of cash, but with a REIT, you can invest in smaller pieces of these companies, ie. through a fractional model, allowing you to invest with very small amounts. This allows you to get started earlier.
Access to other types of real estate
As a retail investor, you may not have access to certain types of real estate like commercial properties, industrials, or the like. In a REIT scenario, you can get access to these types of properties if you believe in the potential and want to be involved.
Potential tax benefits
In many tax codes, REITs have unique tax benefits that are not available with other assets. REITs are typically only taxed at the individual level, rather than at the company level, which means that the distributions you receive from them may be taxed at a lower rate than distributions from other stocks. While these tax benefits may not be as pronounced in the GCC region as they are in other parts of the world, they can still be a factor to consider.
Consistent dividends
REITs typically provide consistent distributions, which can be attractive to investors looking for steady income from their investments. This is not the case with most stocks, which often prioritize growth over dividends.
What does the REIT market look like in the GCC?
Even though the regulations for REITs only came into action in 2006, the very first REIT to come to the UAE was established in 2010 and since then we’ve seen peers crop up in Dubai, Kuwait, Bahrain, Saudi Arabia, and more. Regulations in the region have been slow to change and have generally been very strict, but as they begin to ease, it is expected that there will be a lot of growth in this area in the future. 70% of sovereign wealth funds, for example, are targeting a 10% or higher allocation to real estate going forward – which is likely to buy REIT sentiments and push the industry forward.
How does Stake compare to a REIT?
We are very excited about what we’re doing at Stake because we can take the concept of a REIT and improve it in a number of ways to provide a truly unique investment opportunity for our customers. Here’s why:
More Cost Effective
While private REITs might be cheaper than buying real estate outright, they are still relatively expensive when you look at them on a per-ticket basis. In most cases, you’ll need to put down $50K – $100K as a minimum. With Stake, you can get involved with a lot less than that, from only AED 500!
Transparency
When you purchase a traditional REIT, you are placing a lot of trust in the company you’re investing in because their portfolio holdings are complex and opaque. With Stake, you have full visibility into exactly which properties you are invested in which gives you much greater control and peace of mind as a result.
Ease of use
Getting started with Stake is simple, easy, and fast – in a matter of minutes, your account can be up and running and our user interface makes the whole process one that is intuitive and, dare we say it, enjoyable.
At Stake, we are passionate about opening up the tremendous growth potential for our customers and bringing the magic of crowd-investing to real estate. There are few better opportunities to do so, don’t miss out on this one!
TL;DR | Real estate investment trusts (REITs) are a tool for investors to gain exposure to real estate without directly owning property themselves. REITs own and operate income-generating real estate, such as office buildings and apartments, and distribute a portion of their income to shareholders. There are 2 types, public and private, and offer a way to diversify real estate investments, invest with smaller amounts of money, and potentially benefit from tax advantages. However, they also come with risks, including the risk of default, changes in market conditions, and the potential for mismanagement.
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One reply on “From the Founder Archives: A Beginner’s Guide to Real Estate Investment Trusts”
Thanks for the information 👍