Office REITs

Office REITs are Real Estate Investment Trusts, which are companies indulging in business of owning, constructing & managing income producing properties like Offices & Office Buildings, which they further lease to multinational companies or tenants for running their business in a central business area and industrial areas.

Office REITs earn rental income from it, which could be monthly, quarterly, or yearly. The office premises or buildings etc. either could be self-generated or could be acquired estates. They also trade on Public Exchange Markets where the investors would invest their funds and become a shareholder of the company.

• Office REITs, or real estate investment trusts, are investment vehicles specializing in owning and managing income-generating office properties, including commercial buildings and business parks.
• Investing in Office REITs allows investors to participate in the office real estate market's potential income and value appreciation without requiring direct property ownership and management.
• The performance of Office REITs is influenced by various factors, including occupancy rates (the percentage of occupied office space), rental rates, economic conditions, and the overall demand for office space in the market.

Commercial office REITs are one which owns and manages the office premises or building in some central part of the area or industrial area, which they lease to the tenants for the rental income depending upon the size of the area rented to the tenants. The pay-out of 90% of the income to the investors is pretty good; however, on the other hand, it limits the growth of the REIT company in the future.

For the same reasons, most of the office REITs companies need to depend upon the debts from the banks and other financial institutions that may prove not healthy for the business standings in the market and for the investors in the company.

However, such REITs allow investors to get some exposure to the real estate market without owning any property. They work as a corporation or a trust, and US office REITs are traded on the stock exchange. The property portfolio includes purchasing, managing, and leasing office buildings, including business parks, office complexes in suburban areas, skyscrapers, and single-tenant buildings.

They generate income from rents collected from tenants and those rents collected are paid out to the investors in the form of dividends.

These commercial office REITs diversify the risk by investing across various geographic locations and different types of properties, as mentioned above. However, their performance depends significantly on lease terms, creditworthiness, and market volatility.

Let us look at a list of office REITs to understand the concept.

Here are some of the examples of US office REITs which have been doing well in the market and are publicly listed company:

1. Alexandria Real Estate Equities: a company listed on the New York Stock Exchange (NYSE) which deals in maintaining and owning Offices for life science purposes. The main highlight of the company is that they preferably rent the places to companies or tenants working in life science and technology fields.
2. Boston Properties: a company listed on the New York Stock Exchange (NYSE: BXP) which deals in maintaining and owning class-A offices for leasing purposes. Class A offices mean high-end offices in a developed area. They also hold some retail and residential properties as well. As per market capitalization, this is one of the largest office REITs.
3. SL Green Realty: a company listed on the New York Stock Exchange (NYSE: SLG) which deals in maintaining and owning offices in New York City for renting purposes. This is the largest office-owning company in New York City. This is one of the major developers in the real estate field.

Thus, a short list of office REITs are explained above for better understanding.

Just like all financial and business related concepts have their own benefits and limitations, this concept of office space REITs also has them Let us try to understand the benefits first.

• Investment in Office REITs provides guaranteed pay-out to the investors or shareholders in the form of dividends as long as the company is generating income from the practice. This ensures a steady income flow investors and is a good investment option.
• The REITs companies get to benefit from tax relief as they do not need to pay corporate dividend tax in case they fulfill some of the criteria. As in the normal cases, companies distributing dividends have to submit corporate dividend tax to the government, and then the remaining amount will be paid out to the shareholders. Hence in the case of office space REITs, the shareholder gets paid out dividends without deducting any tax part from the dividend share of the profit.
• They provide the pool-up estates for the office premises in good industrial areas, and 90% of the income is transferred to shareholders as a dividend, which is an excellent payout to the investors and provides a diversified portfolio against the traditional equity and debt securities.
• It provides liquidity options for the investors and a low cost for the shareholders as buying premises or building a premise may cost significant, but the portfolio offered could become a chance for the investors to buy the office REITs securities, and the money invested becomes less riskier.

The following are the various limitations of the concept which are as given below:

• 90% of the income earned by the Office REITs business is needed to be distributed to the shareholders, and after paying out the rest of the expenses needed to run the business there is no amount left for the future growth of the business through the business income. So without the fund, growing the business becomes more difficult.
• In most cases, due to the unavailability of the fund and for growing the business, the companies depend upon some huge debts, and that might become a problem for the investors, and the investors may lose their income in the future.
• In spite of the no corporate dividend tax, the companies have to adhere to a lot of other legislative regulations that do not make the business smoother or easy-going, and the company may have to pay taxes in another way as per the law of the respective countries and states.
• In some countries, central law does not adhere to the legislative policy and instead administers the same in their states, which creates different regulations for different office REITs depending upon their place of business.

This has been guide to what are Office REITs. We explain them with examples, benefits and limitations. You may learn more about financing from the following articles –

• Depreciation for Rental Property
• Industrial REITs
• Rent to Own Home
• FFO (Funds from Operations)
• Short Sale in Real Estate