What are REITs and how do you trade them?

REITs – or real estate investment trusts – are a popular way to get exposure to the housing market. You can buy or sell REITs in much the same way as a normal share, but there are a few things to be aware of before you trade. Discover everything you should know about REITs in our complete guide.

New Highs 1

What is a REIT?

A REIT is a real estate investment trust, a company that owns, operates or finances income-producing real estate – whether that’s from the properties themselves, debt or the mortgages.

REITs enable retail investors to access real estate assets in much the same way they would any other financial market. This provides the opportunity to diversify their holdings, as well as access dividend-based income.

REITs have suffered amid the global pandemic. So, when you look at the 12-month average, you’ll see that REITs underperformed the rest of the market amid the crisis. The FTSE NAREIT Equity Index had returns of -8.00, while the S&P 500 recovered to have returns of 18.4%.

However, traditionally REITs are a high performing asset. While the S&P 500 achieved average returns of 9.07% over the three years to 2021, the FTSE NAREIT Equity REIT Index had returns of 11.25%. This is what makes REITs popular diversification choices for investors – that, and the fact its easier to buy a REIT than it is to buy a property yourself!

Want to go long or short on REITs? Open an account today or practise in a demo account.

How does a REIT work?

REITs work by investing in different types of real estate properties. They then earn an income by leasing the space and collecting rent, which is then paid out to shareholders via dividends.

There are certain requirements that a company has to meet in order to qualify as a REIT:

  • Hold at least 75% of its total assets in real estate
  • Generate at least 75% of its income from rent, interest and sales from real estate
  • Pay at least 90% of its taxable income to shareholders each year
  • Have a board of directors or trustees
  • Pay tax as a corporation
  • Have at least 100 shareholders – with no more than 50% of its shares held by five or fewer individuals

Types of REITs

There are lots of different types of REITs, but broadly they’re split into standard REITs which invest in real estate itself or mREITs which are mortgage-backed assets that earn income through the interest charged on financing real estate.

 Standard REITs generally focus on a specific part of the sector, such as:

  1. Retail REITs – mostly shops and retail units that make money through rent charged to businesses
  2. Office space REITs – office buildings that generate income through charging money to rent the space with long-term leases
  3. Residential REITs – consists of houses, flats and other buildings or modular houses that make money through rental income and sales
  4. Healthcare REITs – the real estate involved in hospitals, medical centres and nursing homes that make money through operations and occupancy fees

Are all REITs publicly traded?

Most REITs are publicly traded, just like normal stocks. They’re listed on normal stock exchanges and offer the same benefits to investors that normal shares do, such as dividends.

However, there are also public non-listed REITs which are registered with the securities and exchange commission but don’t trade on exchanges, and private REITs which don’t offer shares to public investors.

Do REITs pay dividends?

Yes, REITs pay dividends and because they’re required to pay out 90% of their income, REITs often have higher dividends than normal stocks. The average dividend yield for stocks in the S&P 500, for example, is approximately 1.38%, while the average dividend yield for a REIT is 4.3%.

A lot of REIT trading strategies revolve around compounding these dividends – this is what is known as a passive income. Obviously, some REITs have higher dividends than others, so if you’re focusing on this strategy, you’d want to look specifically at each REIT’s pay out history.

It’s worth nothing that a lot of REITs don’t meet the qualified dividends rate that falls under the ordinary tax rates, which can mean you’ll end up paying a larger amount of tax than you would on stock dividends.

Are REITs defensive?

Residential REITs are considered defensive stocks, as people will always need housing regardless of the state of the economy. However, other types of REITs such as offices, retail and some high-end residential, are more cyclical – their income is dependent on people having money to spare and businesses thriving.

How do interest rates affect REITs?

REITs are particularly sensitive to interest rates but perhaps not in the way you’d expect. Typically, when interest rates rise, asset prices fall as the higher cost of borrowing will reduce future earnings potential. But often for REITs, the relationship is the opposite.

Rising interest rates occur when there is a period of economic growth, which leads to increased spending and REIT share prices.

However, the opposite is true during periods of lower interest rates. If we look at the Covid-19 pandemic for example, interest rates were at historical lows, and a lot of retail businesses were going bankrupt and defaulting, while residential tenants were unable to pay their rent. REIT prices saw a lot of volatility while the economy was suffering.

And as the economy recovers from the pandemic, questions are still being asked over whether rents in city areas can remain high as working from home enables people to look for cheaper properties outside of urban areas. All of which could play out on the share prices of REITs.

While these negative market movements can be a deterrent for a lot of investors, for traders the market movement can create potential shorting opportunities.

Want to speculate on REITs? Create an account today and start trading in minutes.

How to choose REITs: what to look for in a REIT

While all REITs are required to pay out an income, not all REITs are worth looking at. Here are a few factors to consider when choosing a REIT:

  1. Assets. It might seem obvious, but the underlying assets themselves are a huge part of what makes a REIT successful or not. If the buildings are poor, the tenants seem unreliable or the debt is bad, then you want to steer clear of the REIT
  2. Dividend yields and capital appreciation. Just like assessing a company’s earnings reports, you want to look at the income each REIT has historically earned and paid out to investors. This can give you an idea of its future outlook and your likely returns
  3. Liquidity. Just like shares, your ability to enter and exit positions will depend on how many other parties are looking to buy and sell the REIT at any point in time. Luckily, REITs are far more liquid than buying and selling property itself
  4. Management. As you would a company, it’s important to look at the management team or firm behind the REIT to understand what their experience is and the likelihood of them leading the trust to success

UK REITs

There are a huge range of UK property REITs that are listed on the London Stock Exchange, making them accessible for traders and investors.

Examples of UK REITs include:

  • LXi REIT: a UK-based company with a diverse portfolio including hotels, food and discount retail, industrial sites, car parks, student accommodation, office spaces, leisure sites and care homes
  • Secure Income REIT: a large company with assets including hospitals, pubs, theme parks (including Alton Towers and Thorpe Park), Travelodge hotels, and leisure arenas such as Manchester Arena
  • Regional REIT: a commercial property company focused on offices outside of London
  • Hibernia REIT: an Irish office space company listed in Dublin and on the LSE that

How to buy REITs in the UK

  1. Create an account with City Index or log in
  2. Search for the REIT you want to trade in our platform
  3. Assess the REITs performance to decide whether to buy or sell
  4. Open a position and monitor the market

When you trade UK REITs with us, you’ll be doing so using derivatives – depending on your location this could be via spread bets or CFDs. The benefits of trading REITs is that you can speculate on whether their price will rise or fall, meaning you can short the UK housing market. This can be a great option if you think that UK house prices are due to fall – or any other kind of real estate for that matter.

US REITs

As with UK REITs, there are plenty of US REITs to choose from depending on which type of REIT you’re interested in. While a lot of REITs were massively impacted by the Covid-19 downturn, following the introduction of the $1.9 trillion stimulus package, there could be a rebound in US commercial real estate.

Examples of US REITs include:

  • Apartment Income REIT Corp: known as AIR communities, this REIT owns and operates luxury apartment communities across the US
  • X-Links® Monthly Pay 2xLeveraged Mortgage REIT ETN: a monthly compounded 2x leveraged index that gives you exposure to the FTSE NAREIT All Mortgage Capped Index, composed of tax-qualified U.S. mortgage REITs

How to buy REITs in the US

  1. Create an account with City Index or log in
  2. Search for the REIT you want to trade in our platform
  3. Assess the REITs performance to decide whether to buy or sell
  4. Open a position and monitor the market

Build your confidence risk free

More from Stocks

Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.