How Do REITs Work?
A 7-minute read
A REIT (Real Estate Investment Trust) lets you own a slice of property without buying a building. It trades on stock exchanges like a stock, and legally must pay most of its income to shareholders.
Buying property is one of the most concrete investments there is, but actually owning a building is impractical for most people. A REIT solves this. It is a company that owns real estate, and you buy shares in that company.
The short answer
A REIT is a publicly traded company that owns, operates, or finances income-producing real estate. By law, REITs must distribute most of their income to shareholders as dividends, typically at least 90 percent. This creates a steady income stream for investors without requiring direct property ownership.
The full picture
How REITs make money
REITs generate income in two main ways. Equity REITs earn rent from properties they own and operate. These include office buildings, shopping centers, apartment complexes, warehouses, and data centers. Mortgage REITs earn interest from financing real estate, similar to how a bank makes money on loans. Some REITs do both, called hybrid REITs.
The legal requirement to distribute income is what sets REITs apart from regular real estate companies. This rule exists to prevent the company from accumulating too much cash and to ensure investors get income from the properties.
Investing in a REIT means buying shares on a stock exchange, exactly like buying shares in Apple or Coca-Cola. The share price moves based on the REIT’s performance and on how the stock market values real estate generally. Wikipedia
How REITs differ by country
The United States created REITs in 1960, and the model spread worldwide. The United Kingdom introduced REITs in 2007. Canadian REITs have been around since 1993. Australia has A-REITs, Japan has J-REITs, and similar structures exist in Singapore, Hong Kong, France, Germany, and at least twenty other countries.
The specific rules vary by country, but the core idea stays the same. The entity avoids corporate tax by distributing income to shareholders, who then pay tax on dividends at their personal tax rates. This avoids the double taxation that regular corporations face.
Real examples
Some of the largest US REITs include Prologis (warehouses), Equinix (data centers), and Simon Property Group (shopping centers). These trade on major exchanges and have market capitalizations in the tens of billions of dollars.
In the UK, British Land and Landsec are major REIT-style property companies. Canada has RioCan and Choice Properties. Japan has Japan Real Estate Investment Corporation. Each market has its own naming conventions and listing requirements.
Why it matters
REITs open real estate investing to anyone with a brokerage account. You can own a slice of commercial property portfolios, earning rental income and benefiting from appreciation, without dealing with tenants, leases, or property management. This makes real estate investing accessible and liquid.
The dividend yield on REITs often beats traditional bonds and bank deposits, which attracts income-focused investors. NAREIT REITs also tend to perform differently than stocks, adding diversification benefits to a portfolio.
This is particularly valuable in countries with weaker currencies or limited property investment options. A Singaporean investor can buy US warehouse REITs, gaining exposure to American e-commerce growth without transferring money internationally or managing property overseas.
Common misconceptions
REITs are the same as real estate stocks.
Not always. Some property companies call themselves REITs but may not meet the legal distribution requirements in their country. Always check that the entity actually distributes most income.
REITs always beat direct property ownership.
Not guaranteed. REITs add a layer of corporate costs, and share price movements do not always match real estate values. Direct property sometimes appreciates faster than REIT shares.
REITs are only about office and retail.
Wrong. REITs own many property types: data centers, cell towers, healthcare facilities, infrastructure, and forests. The diversity continues expanding.
Key terms
Distribution requirement: The legal percentage of income a REIT must pass through to shareholders. Most countries require 90 percent or more.
NAV (Net Asset Value): The total value of all properties owned by the REIT, minus debts, divided by shares outstanding. This shows what the REIT would be worth if liquidated.
Funds from Operations (FFO): A REIT-specific earnings measure that adds depreciation back to net income, since depreciation is non-cash but real estate often appreciates.