REIT
Also known as: Real Estate Investment Trust
Own a slice of office towers, warehouses or data centres through a share that pays out most of its rent.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
A REIT is a company whose business is owning income-producing property — apartments, malls, warehouses, cell towers, data centres — and passing the rent through to shareholders.
The special part is the deal REITs strike with tax authorities: in most countries a REIT pays little or no corporate tax as long as it distributes the bulk of its taxable income (in the US, at least 90%) as dividends. That is why REITs are known for high, steady payouts.
Buying a REIT share gives you property exposure with none of the landlord work: no tenants calling at midnight, instant diversification across hundreds of buildings, and the ability to sell in seconds rather than months.
a paymentonly if a condition is met
A REIT is a pass-through: the tax exemption is paid for with a distribution obligation.
Every month
- Tenants → The REIT The lease, not the property market, is what produces the cash. Its length and the tenant's credit are the two things that decide how reliable it is.
- The REIT → Lenders Paid before anything reaches shareholders, which is why a rise in financing costs hits the distribution before it hits the buildings.
Every quarter or year
- The REIT → You A REIT regime typically requires most of the taxable income to be distributed in exchange for the company itself not being taxed on it. The obligation is the point of the structure.
When it needs money
- You → The REIT Because it must distribute rather than retain, a REIT that wants to grow has to come back to shareholders or to lenders for the money.
- Asset class
- Listed real estate
- Instrument type
- Tax-advantaged property company
- Traded
- Exchange
- Typical users
- Income investors, asset allocators
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketdecides it
- Creditmatters
- Liquiditymatters
- Fundingdecides it
- Operationalbarely applies
What decides it here. Rent is contractual and reasonably steady. What decides the outcome is refinancing: a REIT must distribute rather than retain, so it returns to lenders on their schedule, not on its own.
3 · IntermediateHow it works in practice
The metrics that matter
- FFO (Funds From Operations): net income + depreciation − gains on sales. Property depreciation is an accounting fiction (buildings often appreciate), so FFO, not earnings, is the REIT world's profit measure. AFFO further deducts recurring capex.
- NAV: appraised value of the properties minus debt — shares trade at premiums or discounts to it.
- Cap rate: a building's net operating income divided by its value — the property market's yield.
- Leverage: REITs typically run 30–50% debt-to-assets, so financing costs matter.
Sectors behave differently
Logistics and data-centre REITs ride e-commerce and cloud demand; office REITs fight remote work; regulated residential differs from hotels, which reprice nightly. "REITs" is a wrapper, not a single bet.
Rates sensitivity
REITs borrow heavily and their dividends compete with bond yields, so rising rates hit them twice: financing gets dearer and investors demand higher yields (lower prices). Long leases with fixed rents make some REITs behave like long-duration bonds.
4 · AdvancedPricing & valuation
Valuation approaches
NAV approach: value each property by capitalising stabilised net operating income at market cap rates, then adjust for debt:
What the symbols mean
- cthe coupon rate
Dividend/AFFO discount: treat the share as a growing income stream, \(P = \dfrac{\text{AFFO}_1 \cdot b}{r - g}\) with payout ratio \(b\); \(g\) is driven by contractual rent escalators, re-leasing spreads and development yield spreads over cap rates.
Implied cap rate
Reverse-engineer what the equity market says buildings are worth:
What the symbols mean
- cthe coupon rate
Comparing \(c_{\text{implied}}\) to private-market cap rates identifies public/private arbitrage — the driver of take-private waves when REITs trade cheap.
Risk model
REIT returns load on equity beta, term-structure level (duration ~ lease length adjusted for leverage), credit spreads (via refinancing), and a property-sector factor. Leverage amplifies asset moves: with loan-to-value \(L\), equity NAV volatility ≈ asset volatility / (1 − \(L\)).
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give REIT in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put REIT beside any other instrument →
Where this instrument shows up elsewhere
- EasyLeverageConceptsBorrowed money does not change what an asset earns