By: Edward McCarthy
President: Sell By Owner Listings, Inc.

Real Estate Investment Trusts: The Investment Trust

A real estate investment trust cannot be fully understood without first understanding the nature of the investment trust. The investment trust is a complex but yet easy to understand phenomenon. Investment trusts are companies that invest in the shares of other companies in order to act as a collective investment scheme. A collective investment scheme is a way of investment with other people in order to participate in a wider range of investment options than may be feasible for an individual investor and to also share the costs of doing so. Rather than investing in shares of other companies per se, real estate investment trusts invest in real estate. It is a relatively easy concept to understand but moderately difficult to grasp in its entirety.

In an investment trust, investors' money is pooled together from the sale of a certain number of shares a trust issues when it is first launched. Typically, the board will delegate responsibility to a professional fund manager, or trustee, to invest in the stocks and shares of a wide range of companies. The number of investments as well as the magnitude of these investments surpasses the range that most people could practically invest in by themselves. Oftentimes the investment trust will have no employees, but rather a board of directors comprising only non-executive directors. In recent years, however, this has started to change; especially with the emergence of both private equity groups and commercial property trusts both of which sometimes use investment trusts as a holding mechanism.

Investment trusts are trade on stock exchanges like other publicly traded companies but the share price, or price of each share of stock, does not always reflect the underlying value of the share portfolio held by the investment trust. In a case such as this, the investment trust is referred to as trading at a discount price as compared to its net asset value. This is often beneficial to the investor seeking to amass large amounts of stock shares before selling and reaping the dividends. An investment trust is able to continue its investment habits by the allowance to borrow capital to purchase shares. This however, increases investor risk. One of the reasons for investment in the actual investment trust is due to the fact that less risk is assumed so this is not a common practice.

The real estate version of the investment trust has been in existence for a number of years. For the past forty years individuals have been able to buy into a large scale investment scheme in order to reap the full benefits of investment in a low risk but yet high return scenario. With the collective might of numerous investors combined with the power of corporation status doing the actual investment, there seems to be an unstoppable force capable of generating vast profits from the investment into commercial property. Investment in an investment trust, particularly a real estate investment trust, is a way of investing without investing in the traditional sense of the word. The security of this type of transaction combined with the high profit possibility makes investment in a real estate investment trust a worthwhile decision.

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