If you want to invest in real estate, but you don't have thousands of dollars, then REIT real estate funds will help you. We tell you what they are, as well as how and why to invest in them

What are real estate REIT funds and why invest in them?

You can invest in real estate in various ways: for example, you can buy apartments and warehouses yourself in order to rent them out. Or try to buy real estate cheap, then sell it more expensive.

2. How do REITs pay dividends?

Under US law, REIT trusts are required to pay shareholders at least 90% of income in the form of dividends annually. This feature exempts funds from paying federal taxes. Because of this, the REIT is often called a tax haven.

In the United States, under President Donald Trump, the corporate tax rate dropped from 35% to 21%. Because of this, the status of REITs as "tax havens" has been shaken. But, according to Joe Biden's program, the corporate tax for American companies can rise to 28% — this will help increase the attractiveness of the REIT in the eyes of investors.

Typically, the REIT dividend yield ranges from 2% to 5%, but can reach up to 10%. Such a high dividend yield is generally not typical of the US stock market, where companies usually pay investors about 2%. Therefore, a REIT yield under 10% can mean either high risk or the absence of positive stock dynamics.

3. What do you need to know about taxes when investing in a REIT?

Russian investors pay taxes on REIT trading on the same principle as on income from American stocks: on profits from the difference in the purchase and sale of securities and income from dividends.

With dividends on American shares, the broker automatically deducts 30% of their amount from the Russian investor. For most stocks, this figure can be reduced using the W-8BEN form — but REIT real estate funds just represent an exception to this rule. In any case, the tax on income in the form of dividends on them will be 30%.

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4.How to choose a REID for investment?

"I would recommend all novice investors to take large REITs with a capitalization of at least $ 20-30 billion. Companies with billion-dollar revenue streams and stable profits. Another important criterion, besides capitalization, is the location of the fund," advises the founder of the investment platform Highsystems.org Victor Serchenya.

"Take China, for example. The Big Bay is the fastest growing region and there is expensive real estate. Due to the lack of space, the cost continues to grow. The same situation is in Singapore. However, fixation on a particular state is more risky than global. For example, if the data centers of a fund are located in 80 different countries, then this is a more stable story than in any one state," he added.

5.How to buy REIT papers?

There are several hundred public real estate funds in the world, of which more than 300 REITs are traded on American exchanges. About 60% of all the world's similar real estate funds are formed in the USA. Their shares can be purchased for any amount.

As already mentioned, a REIT is a separate company. Therefore, before buying its share, it is worth conducting a financial analysis: pay attention to the revenue, profit, capitalization of the company, study its financial statements, multipliers and debt burden.

Particular attention should be paid to the FFO (funds from operations) indicator — it is equal to net profit, to which depreciation of property is added and from which profit (or loss) from the sale of real estate is deducted. There is also an adjusted version of Adjusted Funds From Operations (AFFO), which takes into account regular income and expenses.

These are the key indicators characterizing the activity of the REIT: even for comparing real estate funds with each other, it is customary to use the multipliers P/FFO, P/AFFO and FFO / S instead of the classic P/E and P/S.

It can be difficult to pinpoint a specific paper, so the most common way to invest in a REIT is to buy an ETF consisting of different funds. Some of the largest ETFs for REIT funds are Vanguard Real Estate Index Fund (VNQ) and Vanguard Global ex-U.S. Real Estate Index Fund (VNQI).

6. Which REITs can a private investor buy right now

There are no classic REITs in Russia at the moment: the legislation does not yet make it easy to create all kinds of REITs and trade them. Therefore , to purchase the desired REITs directly , you may need a foreign brokerage account .

However, some REITs from the S&P 500 index can be bought through the St. Petersburg Stock Exchange with the help of a Russian broker. Now 35 companies are available. Let's give an example of five of them.

Realty Income is a real estate investment fund that earns on commercial real estate in the USA, Puerto Rico and the UK. He owns pharmacies, shops, convenience stores, hypermarkets, fitness centers, cinemas - more than 6 thousand objects in total. The company cooperates with the Walgreens pharmacy chain, 7-Eleven supermarkets, and the FedEx delivery service. Realty Income pays dividends monthly, not quarterly like most funds, for 607 consecutive months.

Equinix is a real estate fund that builds server farms. IT companies place equipment in the foundation's data centers, of which Equinox has more than 250 worldwide. The company pays dividends once a quarter. Equinix data centers are used by companies such as Amazon, Google, Microsoft, Oracle, Zoom.

Simon Property is the largest retail real estate REIT and the largest mall operator in the United States. In addition to shopping malls, owns and operates boutiques, restaurants, entertainment and business centers in North America, Europe and Asia.

Kimco Realty — this real estate fund also owns shopping malls in the USA — acquires, develops and manages them. As of December 2020, the fund had shares in 400 retail spaces, including 70 million square feet of leased space, mainly concentrated in the largest markets. The company pays dividends every quarter.

Macerich is another REIT specializing in shopping malls. The third largest mall operator in the United States. As of December 31, 2020, the company owned shares in 52 facilities with a total area of 50 million square feet.

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7. Which REITs should I pay attention to? Expert advice

"I would divide investment opportunities in the real estate market into two classes,— says Viktor Serchenya. — The first is industrial REITs. For example, Prologis. These are the largest logistics centers in different countries of the world. The fund's dividend yield is about 2.6%. For comparison, 2.3% of the world's GDP passes through their logistics centers. That's about $2.7 trillion. Business stability is good."

Despite the fact that the real estate market in many countries fell during the pandemic, the expert notes, including in China, logistics centers were stable. And if the offices were vacated, then everyone needs products and goods. And due to the fact that e-commerce is developing, the demand for such sites will only increase.

"The second asset class among real estate funds that I would single out is specialized REITs," Victor continues. — For example, Digital Realty Trust and Equinix. These are the two largest REITs that own data centers around the world, they are quite stable. The dividend yield is about 3%. I think this sector will grow in the same way as e-commerce."

International financial consultant and author of the book "When bad is good: how to make money on investment ideas" Isaac Becker suggests paying attention to more specific funds: "The REIT market is very extensive. One of the latest interesting educated funds Innovative Industrial Properties (IIPR) works with real estate for those who are engaged in medical marijuana. These people need special buildings with special protection measures. This REIT has grown by 200% over the past year and also pays good dividends — about 3%. But this fund, of course, is already for those who love risk and are ready for it."