Global REITs Development Landscape

Real Estate Investment Trusts, or REITs, have emerged as a prominent investment vehicle since their inception in the United States in the 1960sThese trusts enable individual investors to participate in large-scale, income-producing real estate without having to buy, manage, or finance any properties themselvesBy pooling funds through the issuance of securities, REITs offer a way for investors to earn a proportional share of the generated income, significantly expanding access to real estate investmentAccording to Nareit, as of the end of 2023, more than 940 REIT products exist across 42 countries and regions, showcasing the global expansion of this investment modelNotably, since 2020, a rapid increase in the number of REITs was noted, with Europe seeing a 31% growth with 62 new listings and Asia following closely behind with a 22% increase and 32 new REITs.

This amplified growth indicates a robust acceptance and establishment of the REIT model internationally

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The countries that have adopted this structure now account for over 80% of the global GDP and represent more than 60% of the world's population, effectively covering major economic regions across the globeCurrently, the total market capitalization of global REITs stands at approximately $2 trillionNotably, the United States holds the majority, with a market value nearing $1.3 trillion, making it the largest REIT market globally, representing about 65% of the total.

Turning to the American REIT market, a variety of characteristics define its structural landscapePrimarily, U.SREITs operate under a corporate structure, whereby they raise funds by issuing shares to investors, who then become shareholdersThe rental income derived from properties held within the REIT is returned to investors in the form of dividendsThe operational methodology typically involves the REIT issuing stocks to the public, using those funds to acquire interests in operating partnerships, thereby earning profits from the operation and management of real estate assets

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After a lock-up period, original property owners can convert their holdings into REIT shares or cash equivalents.

Revenue generation for American REITs is predominantly from equity, with Equity REITs accounting for over 95% of the total market capitalizationThese REITs own and manage properties that generate income, such as office spaces, shopping malls, and multi-family housing units, thereby deriving their income from rents and asset appreciationUnlike traditional real estate companies, which may engage in development and sales, REITs focus solely on the operation of properties to secure rental income, enhancing cash flows, and realizing capital appreciation.

Government policy has significantly bolstered the REIT sector's growth since its foundingDuring the 1960s, the U.Sintroduced The Real Estate Investment Trust Act to encourage individual investors to participate in the real estate market by offering tax incentives for indirect ownership

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In the 1990s, the government further facilitated the REITs construct by allowing certain REITs to be exempt from corporate income taxes and capital gains taxes, catalyzing a rapid increase in issuance and interest in the modelMore recent legislation has relaxed restrictions on the types of invested assets, allowing a diverse mix, which has further promoted innovation within the sector.

Regarding the types of assets that U.SREITs encompass, there are currently 13 categories, including industrial, office, retail, residential, and hospitality propertiesAs of the end of 2023, the Nareit FTSE Equity REITs Index demonstrates that there are 140 publicly traded REITs within the U.S., with retail REITs leading in numbers at 30, followed by residential and office categories, each with 19. The market is dominated by retail and residential assets, which together account for over 40% of the REIT sector.

In terms of market performance, over recent years, the REIT index has lagged behind broader stock market indices

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The unprecedented rise of technology stocks, especially the so-called "FANG" stocks—Facebook, Amazon, Netflix, and Google—has outpaced REITs, as they are closely linked to real estate and infrastructure sectorsWhile REITs continue to provide a steady stream of income for many investors, the relative performance explains a shift in market focus driven by the rapid growth of tech stocks during this period.

Nevertheless, amidst fluctuating market dynamics, REITs have shown significant long-term investment potentialWhen looking at yield performance across varying time horizons, longer-term bonds (25 to 50 years) have shown to outperform other assets considerably, affirming REITs as a valuable long-term asset for wealth building and income generation.

CEM Benchmarking further explores the correlation of American REITs with broader real estate and equity assetsThrough distinct studies, it is indicated that REIT returns display high correlation with real estate performance but exhibit lower alignment with fixed-income assets, signifying the pronounced equity character of U.S

REITs compared to their debt attributes.

An intriguing observation post-2021 indicates a divergence in performance between REIT indices and U.Shousing pricesPrior to this period, the two had grown closely aligned, but subsequent to 2022—with supportive government fiscal interventions—U.Sreal estate has rapidly recovered, seeing vacancy rates achieve record lows while prices continue to climbIn contrast, REIT valuations have faced downward adjustments due to rising implicit capitalization rates influenced by interest rate hikes, leading to divergence from housing prices.

Looking ahead, the future of REITs appears promising, as the model—originating in a period of economic decline—has capitalized on tax advantages and inherent flexibility to solidify its standing as an instrumental asset class within global capital marketsAn increasing number of regions worldwide are beginning to embrace the REIT structure, with an emphasis on the sustainability and income generation potential it possesses