Investment Insights: Taking a Global Approach to Investing in Public Real Estate
Real Estate Investment Trusts (REITs) are publicly traded equities that own, finance or operate income generating real estate. REITs typically own different types of commercial real estate including office buildings and shopping centers, but also can own hospitals, prisons, residential apartments, hotels and timberland. Certain REITs engage in providing financing for real estate. Since the Cigar Excise Tax Extension of 1960 created US legislation for the REIT structure, similar structures have been put in place in over 30 countries around the world.
As of December 31, 2014, REITs as a fraction of publicly traded investable equities represent 2.71% of world market capitalization.¹ Real estate as an asset class (including private real estate), however, dominates traditional equities in terms of aggregate capitalization. While the world equity market capitalization is a bit larger than $64 trillion, the private global real estate market exceeds $156 trillion.² REITs provide investors with direct access to an asset class traditionally known for its illiquidity, high transaction costs, and high investment minimums.
REITs offer certain benefits to investors, including historically attractive returns, low correlations to traditional asset classes, low investment minimums, and daily liquidity. The drawbacks of REITs include additional costs (such as management fees) over owning private real estate and higher distributions relative to other equities.