US real estate investment trusts now manage $4.5 trillion of real estate around the world. Many Wall Street groups offer these tax-friendly funds to individual investors.
KKR’s real estate business is one of the big players in the REIT space. The private equity firm manages several REIT funds. KKR Real Estate Select Trust, which currently has $1.5 billion in assets under management, paid a 5.4% dividend to its investors in July 2023.
But the benefits go beyond returns.
“When you look at the after-tax equivalent of that return, it’s very compelling,” said Billy Butcher, CEO of KKR’s global real estate business. “Depreciation on our properties covers 100% of the income generated by our properties, and there is no tax on that dividend,” he said in an interview with CNBC.
Larger funds sometimes contain a diversified pool of assets. Categories can include offices, dormitories, casinos, wooded areas, cell towers, server farms, self-storage properties, billboards, and more.
“In the 1960s there were three or four different types [of REITs], said Sher Hafeez, managing director at Jones Lang LaSalle, a real estate services company. “Meanwhile I can count at least 20 different types.”
Some of the top-performing REIT subsectors in recent years include data centers, self-storage real estate, residential real estate and tower REITs. Residential real estate returned 16% from 2010 to 2020, according to a report by S&P Global Investments.
Investor-friendly tax rules can also increase the pace of large-scale developments.
“The presence of REITs as a potential exit helps the market and makes financing more readily available,” said Michael Pestronk, CEO and co-founder of Post Brothers, a Philadelphia-based residential developer.
Some funds, such as Invitation Homes and American Homes 4 Rent, were formed in the wake of years of slowdown in US home construction. Back then, REITs bought and managed commercial real estate, which could also include products such as holistically planned condominiums or traditional apartment complexes.
In recent years, public trusts have targeted the single-family home rental market, and today, these REITs have grown tremendously — enough to create new neighborhoods altogether.
Watch them Video Learn more about the basics of real estate investment trusts above.