What are REITs?

Real estate investment trusts (REITs) emerged essentially as a tax concept under US tax law. REITs are said to have originated in the USA in 1960s - but esssentially, they owe existence to the IRS rule that grants tax immunity to the trust subject to certain conditions. The structuring of REITs flows from the mutual fund structure - ownership of real estate split into various "units", implying proportional beneficial interest of the assets of the trust. In other words, it will not be wrong to call a real estate mutual fund as a REIT.

Thus, a REIT offers equity-type units to the investors - the value of a REIT unit is a fraction of the value of the property/properties owned by the REIT. REITs are typically publicly quoted and traded, similar to the units of a mutual fund.

REITs are often classed into "equity-type" REITs and "mortgage-type REITs". The former own properties and the latter simply create mortgages on properties. The latter take loan-type exposures in properties and are very similar, at least economically, to commercial mortgage backed securities.

REITs across the world:

The concept of REITs has quickly spread across the world. A 2004 Ernst and Young report says that REIT legislation has been adopted in at least 19 countries across the world.

Framing REIT legislation essentially implies permitting real estate investing mutual funds, and laying down the relevant tax rules. By and large, countries have adopted the US-style rules which require a minimum dividend distribution by the REIT.

A 2005 Real Estate Market Outlook by Ernst and Young speaks of the imminent REIT boom. It predicts that by next year, the total value of non-US REIT assets could grow to USD 140 billion.

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