The U.S. real estate investment market is currently managed by real estate investment trusts (REITs) that oversee a staggering $4.5 trillion worth of global real estate assets. These tax-friendly funds are widely offered to retail investors on Wall Street.
KKR, a prominent private equity firm, is a major player in the REIT industry. Their real estate business manages multiple REIT funds, including the KKR Real Estate Select Trust. With $1.5 billion in assets under management, this trust recently paid a dividend of 5.4% to its investors in July 2023.
However, the advantages of investing in REITs go beyond attractive returns. According to Billy Butcher, the CEO of KKR’s global real estate business, the after-tax yield is highly compelling. He explains that the depreciation from their properties offsets the income generated, resulting in zero taxes on the dividends.
Large REIT funds often consist of a diversified portfolio of assets, including commercial properties such as offices, student housing, casinos, timberlands, radio and cell towers, server farms, self-storage properties, billboards, and more. The range of REIT types has significantly expanded over the years, with at least 20 different categories identified by industry experts like Sher Hafeez, a managing director at Jones Lang LaSalle.
In recent years, certain sub-sectors of REITs have shown exceptional performance. Sectors such as data centers, self-storage properties, residential housing, and tower REITs have delivered impressive returns. For instance, residential housing recorded a 16% return from 2010 to 2020, as reported by S&P Global Investments.
The investor-friendly tax regulations associated with REITs also contribute to the acceleration of large-scale development projects. The existences of REITs as potential exit strategies benefit the market and facilitate the availability of financing, as highlighted by Michael Pestronk, the CEO and co-founder of Post Brothers, a housing developer based in Philadelphia.
During a period of slow U.S. home construction, funds like Invitation Homes and American Homes 4 Rent emerged. These REITs focused on purchasing and managing commercial-scale properties, including master-planned communities and traditional apartment complexes.
However, in recent years, publicly traded REITs have shifted their focus towards the single-family rental market. Their growth has been so substantial that they now possess the capacity to develop entire neighborhoods from scratch.
For a comprehensive understanding of real estate investment trusts, watch the informative video above.
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