Over nearly half a
century, the U.S. real estate investment trust (REIT) industry has
become an important segment of the U.S. economy and investment
markets. U.S. REITs have seen their equity market capitalization
soar from $90 billion to more than $300 billion in just the past
10 years. In the process, that growth has set the stage for the
adoption of the REIT approach to securitized real estate
investment across the globe.
Congress created
REITs in the U.S. in 1960 as a way to make investment in large-scale,
income-producing real estate accessible to all investors in the
same way they typically invest otherwise – through the purchase
and sale of liquid securities. Prior to the creation of listed
real estate equities, access to the investment returns of
commercial real estate equity as a core asset was available only
to institutions and wealthy individuals having the financial
wherewithal to undertake direct real estate investment.
In its early
years, the industry was dominated by mortgage REITs, which provide
debt financing for commercial or residential properties through
their investments in mortgages and mortgage-backed securities. The
market’s interest in equity REITs, which today usually both own
and manage commercial properties, initially was limited because
the ownership and management of assets were required to remain
separate. That restriction changed with the passage of the Tax
Reform Act of 1986, which permitted REITs to both own and manage
their properties as vertically integrated companies and helped set
the stage for a secular wave of equity REIT IPOs in the mid-1990s.
Currently, more than 90 percent of the nearly 200 publicly traded
U.S. REITs are equity REITs that own and most often manage
commercial real estate and derive most of their revenue and income
from rents. In aggregate, these companies own properties across
all major property sectors and all major geographic regions.
In order for a
company to qualify as a REIT in the U.S., it must comply with
certain ground rules specified in the Internal Revenue Code. These
include: investing at least 75 percent of total assets in real
estate; deriving at least 75 percent of gross income as rents from
real property or interest from mortgages on real property; and
distributing annually at least 90 percent of taxable income to
shareholders in the form of dividends.
