Why do institutional investors favor REITs?

Institutional investors favor Real Estate Investment Trusts (REITs) primarily for their ability to provide portfolio diversification and reliable income generation. Investing in REITs allows these investors to gain exposure to the real estate sector without having to buy and manage physical properties, which can be resource-intensive.

The diversification aspect is particularly important because it helps reduce overall portfolio risk; by holding REITs, investors can spread their exposure across various types of properties such as residential, commercial, and industrial. This mitigates the impact of poor performance from any single property or sector.

Moreover, REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends, making them a consistent source of income. This characteristic is especially appealing to institutional investors, who often seek stable cash flows as part of their investment strategy. These features make REITs attractive options for institutions looking to enhance returns while balancing risk in their investment portfolios.

The other options do not accurately capture the key reasons for institutional investment in REITs, as they focus on less relevant aspects such as personal tax advantages or perceived risks without emphasizing income and diversification.