Types of Publicly Traded Real Estate Securities

If you were to throw a dart at a board full of equity real estate investments, you'd probably hit the "REIT" spot. __Real estate investment trusts (REITs)__ are the most common real estate equity security, called equity REITs, and often REIT by default, because of their popularity. These are public equity investments that typically give you some tax advantages and rely on rental income.

A __real estate operating company__ (REOC) is taxed ordinarily. They tend to focus on building or reconstructing properties and selling at a profit. REOCs are more common where the tax advantages of a REIT aren't available. REOCs are taxed as ordinary corporations, so investors tend to not like them as much, leaving them with less access to capital and a higher cost of equity. However, the investment minimum is usually small. Which of these two sounds like returns might be more stable?

You got it!

No, the REIT.

Everyone needs a place to live, so the income produced by REITs tends to be more stable. Development projects more typical to REOCs have greater cyclicality.

That stability encourages leverage in order to boost returns. Obviously that comes with a side dish of extra risk. Debt is so pervasive, especially in real estate, that if you throw a dart at a board with all real estate securities, you'd be more likely to hit a __mortgage-backed security (MBS)__. While REITs and REOCs sum to nearly USD 1,000,000,000,000 in market value, the face value of MBS, which includes residential MBS (RMBS) and commercial MBS (CMBS), is closer to USD 9,000,000,000,000. That's pretty big. MBS will typically offer less risk to investors than the other two. Why do you think that is?

That's right.

No. It's because MBS is debt.

All three of these are public, but only MBS is on the public debt side. REITs and REOCs are public equity. Public securities are indirect investments in real estate. There are private markets for both debt and equity as well. Private equity represents direct investment. So private equity is the purchase of a property, with or without partners. There are private REITs and private REOCs formed for this. Private debt is investing directly in mortgages.

How would you expect real estate equity investments to react to inflation?

Probably not. They will most likely rise in value.

Absolutely.

Real estate is real. So if currency loses value, a building is still a building, and its value will simply rise in nominal terms. So there's some nice inflation protection when investing in real estate. Returns have been substantial over time. One REIT index offered nearly 12% per year in a recent 30-year period. There are diversification benefits from adding real estate to a portfolio. So don't expect REIT, REOC, or MBS to go away very soon.

To summarize: [[summary]]

REIT

REOC

MBS is debt

MBS is public

They should fall in nominal value

They should rise in nominal value

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