Real estate investment trusts (REITs) are companies that own, operate, or finance income-generating real estate assets across various property sectors. REITs offer investors a way to participate in the real estate market by buying units or shares of the REIT, similar to buying shares of a company. REITs distribute most of their income to the unit holders or shareholders as dividends, and also offer capital appreciation potential.

 

But not all REITs are the same. There are different types of REITs, based on the nature of their assets, the way they are traded, and the tax treatment they receive. Each type of REIT has its own characteristics, benefits, and risks, which the investors should be aware of and evaluate before investing in REITs. In this article, we will explain the types of REITs and their characteristics, and provide some examples of REITs in each category.

 

Types of REITs Based on the Nature of Their Assets

 

The first way to classify the types of REITs is based on the nature of their assets, which are either equity or debt. The two main types of REITs based on the nature of their assets are:

 

• Equity REITs: These are REITs that own and operate income-producing real estate properties, such as office spaces, malls, hotels, warehouses, etc. Equity REITs earn income from the rents, leases, or sales of the properties, and distribute it to the investors as dividends. Equity REITs can be further classified into different subtypes, based on the specific property sector they focus on, such as retail, residential, office, industrial, healthcare, hospitality, etc. For example, some of the equity REITs in India are Embassy Office Parks REIT¹, Mindspace Business Parks REIT², and Brookfield India REIT³, which invest in office properties.
• Mortgage REITs: These are REITs that invest in mortgages or mortgage-backed securities, which are loans secured by real estate properties. Mortgage REITs earn income from the interest or fees on the mortgages, and distribute it to the investors as dividends. Mortgage REITs can be further classified into two subtypes, based on the type of mortgages they invest in, which are either residential or commercial. For example, some of the mortgage REITs in the US are Annaly Capital Management⁴, AGNC Investment Corp⁵, and Starwood Property Trust, which invest in residential, commercial, and mixed mortgages, respectively.

 

Types of REITs Based on the Way They Are Traded

 

The second way to classify the types of REITs is based on the way they are traded, which are either public or private. The three main types of REITs based on the way they are traded are:

 

• Publicly-traded REITs: These are REITs that are listed and traded on a recognized stock exchange, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India, or the New York Stock Exchange (NYSE) or the Nasdaq in the US. Publicly-traded REITs are the most liquid and transparent type of REITs, as they can be bought and sold easily and quickly on the stock exchanges, and have to follow strict disclosure and reporting norms. Publicly-traded REITs are also subject to market fluctuations and investor sentiment, which may affect their unit price or share price. For example, some of the publicly-traded REITs in India are Embassy Office Parks REIT¹, Mindspace Business Parks REIT², and Brookfield India REIT³, which are listed on the BSE and the NSE.
• Non-traded REITs: These are REITs that are not listed or traded on any stock exchange, but are registered with SEBI in India, or the Securities and Exchange Commission (SEC) in the US. Non-traded REITs are less liquid and transparent than publicly-traded REITs, as they are not subject to market fluctuations and have limited information available to the investors. Non-traded REITs may also charge higher fees and commissions than publicly-traded REITs, and may have a higher minimum investment amount and a longer lock-in period. For example, some of the non-traded REITs in the US are Blackstone Real Estate Income Trust, Inland Residential Properties Trust, and Jones Lang LaSalle Income Property Trust, which are registered with the SEC.
• Private REITs: These are REITs that are neither listed nor registered with SEBI or the SEC, but are offered to a select group of investors, such as high-net-worth individuals, institutional investors, or family offices. Private REITs are the least liquid and transparent type of REITs, as they are not subject to any regulatory oversight and have no disclosure or reporting obligations. Private REITs may also have higher risks and lower returns than other types of REITs, and may have a higher minimum investment amount and a longer lock-in period. For example, some of the private REITs in India are Indiabulls Real Estate Fund, Kotak India Real Estate Fund, and HDFC Property Fund, which are offered to qualified institutional buyers.

 

Types of REITs Based on the Tax Treatment They Receive

 

The third way to classify the types of REITs is based on the tax treatment they receive, which are either taxable or tax-exempt. The two main types of REITs based on the tax treatment they receive are:

 

• Taxable REITs: These are REITs that are subject to income tax at the corporate level, as well as at the investor level. Taxable REITs are usually those that do not meet the requirements to qualify as REITs under the tax laws of the country where they operate, such as having at least 75% of their assets and income from real estate, distributing at least 90% of their taxable income to the investors, and having a minimum number of investors and a maximum concentration of ownership. For example, some of the taxable REITs in the US are American Tower Corporation, Crown Castle International Corp, and Equinix Inc, which are classified as taxable REIT subsidiaries, as they derive most of their income from non-real estate sources, such as wireless communication towers and data centers.
• Tax-exempt REITs: These are REITs that are exempt from income tax at the corporate level, as they meet the requirements to qualify as REITs under the tax laws of the country where they operate. Tax-exempt REITs are usually those that have at least 75% of their assets and income from real estate, distribute at least 90% of their taxable income to the investors, and have a minimum number of investors and a maximum concentration of ownership. However, tax-exempt REITs may still be subject to other taxes, such as dividend distribution tax, capital gains tax, or withholding tax, depending on the tax laws of the country where they operate and where the investors are located. For example, some of the tax-exempt REITs in India are Embassy Office Parks REIT¹, Mindspace Business Parks REIT², and Brookfield India REIT³, which are exempt from income tax at the corporate level, but have to pay a dividend distribution tax of 15% on the dividends paid to the investors, and the investors have to pay a capital gains tax of 10% or 15% on the sale of the REIT units, depending on the holding period and the mode of sale.

 

Conclusion

 

REITs are a unique and attractive way to invest in the real estate sector, without having to buy and manage physical properties. REITs have different types, based on the nature of their assets, the way they are traded, and the tax treatment they receive. Each type of REIT has its own characteristics, benefits, and risks, which the investors should be aware of and evaluate before investing in REITs. By understanding the types of REITs and their characteristics, you can choose the REIT that suits your goals and preferences.

 

Sources:

 

• Embassy Office Parks REIT
• Mindspace Business Parks REIT
• Brookfield India REIT
• Annaly Capital Management
• AGNC Investment Corp

Unlocking Potential Understanding the Minimum Investment in REITs