Learn · Understand markets
REITs and property
Owning buildings through a share. The income is real, and so is the leverage you may not have noticed.
A real estate investment trust owns income-producing property — offices, warehouses, flats, shopping centres — and trades as a share. You get exposure to property without buying a building.
The defining rule
Fact
REITs must distribute most of their taxable income
In exchange for favourable tax treatment at the company level, a REIT is generally required to pay out the large majority of its income to shareholders. That obligation is why REITs typically carry high distribution yields — it is a structural feature, not a sign of generosity.
In exchange for favourable tax treatment at the company level, a REIT is generally required to pay out the large majority of its income to shareholders. That obligation is why REITs typically carry high distribution yields — it is a structural feature, not a sign of generosity.
It has a consequence: a company paying out nearly everything it earns cannot fund much growth from retained profits. It grows by raising new money, either borrowing or issuing shares.
Which makes interest rates central
- Borrowing costs. Property is bought with debt. Rates rising makes every refinancing more expensive.
- Valuation. Property is valued partly off the yield investors demand, and that demand moves with bond yields.
- Competition for the income. When safe bonds yield little, a property yield looks attractive. When bonds yield more, less so.
Interpretation
A REIT is a leveraged bet on property, whether or not it is described that way
The buildings are bought with borrowed money, so the equity absorbs both the gains and the losses on a larger asset base. A modest fall in property values can be a large fall in the share price, and the mechanism is arithmetic rather than sentiment.
The buildings are bought with borrowed money, so the equity absorbs both the gains and the losses on a larger asset base. A modest fall in property values can be a large fall in the share price, and the mechanism is arithmetic rather than sentiment.
What to look at
- Occupancy. Empty space earns nothing and still costs money.
- Lease length. Long leases to solid tenants are a much more predictable income than short ones.
- Debt maturity. When does the borrowing need refinancing, and at what rate? See debt and leverage.
- Sector. Warehouses, offices and flats have had completely different fortunes. “Property” is not one asset.
A REIT is a share, not a building. It trades daily, moves with the market on days when no building changed hands, and its price can diverge substantially from the appraised value of what it owns.
Education, not advice. These lessons explain how things work. They do not tell you what
to buy, and Wealth Signal does not publish recommendations. Full disclaimer.