Investments, tenth edition

  Real Estate Investment Trusts (REITs)   

A REIT is similar to a closed-end fund. 

REITs invest in real estate or loans secured by real estate. Besides issuing shares, they raise 

capital by borrowing from banks and issuing bonds or mortgages. Most of them are highly 

leveraged, with a typical debt ratio of 70%. 

 There are two principal kinds of REITs.  Equity trusts  invest in real estate directly, 

whereas  mortgage trusts  invest primarily in mortgage and construction loans. REITs gen-

erally are established by banks, insurance companies, or mortgage companies, which then 

serve as investment managers to earn a fee.  

  

1

 Jeffrey Pontiff, “Costly Arbitrage: Evidence from Closed-End Funds,”  Quarterly Journal of Economics   111 

(November 1996), pp. 1135–51. 

bod61671_ch04_092-116.indd   95

bod61671_ch04_092-116.indd   95

6/18/13   8:35 PM

6/18/13   8:35 PM

Final PDF to printer

---

96  P A R T  

I

 Introduction