Guide To REITs: Everything You Need To Know

In simple words, a Real Estate Investment Trust is a holding company that owns and operates income-generating property assets.

REITs invest in most types of property, including apartment buildings, offices, shopping malls, industrial warehouses, cell towers, data centres, hotels, and medical facilities.

These trusts pool together capital from numerous investors with the aim of earning income through the professional management of the property portfolio, without individual shareholders having to buy and hold the physical property.

Most REITs are publicly traded like stocks, making them a highly liquid investment with predictable cash flows and dividend distributions. In Australia, REITs listed on the ASX are referred to as A-REITs.

Broadly, there are two main types of REITs:

Equity REITs: This is the most common type of REIT. Equity REITs invest in and own physical real estate. Typically, they generate income by leasing space and collecting rent on property assets, which is then paid out to shareholders in the form of dividends.

They can either specialise in a particular real estate sector such as office buildings, or can be diversified and hold different types of properties in their portfolios. They can also invest in local and international markets.

Examples of equity REITs on the ASX include Centuria Industrial REIT, Aspen Group and Garda Diversified Property Fund.

Mortgage REITs: These REITs, often called m-REITs, and don’t involve owning real estate directly. Instead they finance real estate owners and operators and earn income from the interest on these investments.

Examples of m-REITs on the ASX include 360 Capital Mortgage REIT and Qualitas Real Estate Income Fund.

Investors generally find REITs attractive for the following reasons:

• Regular income: REITS own income-generating assets and have a consistent, predictable cash flow that helps provide a regular return for shareholders in the form of distributions.
• Diversification: REIT investors get access to a large property portfolio that generally offers diversification across property sectors, geographical locations and asset types.
• Liquidity: Because most REITs are publicly traded like stocks, they are considered a highly liquid form of investment, in comparison to residential property and other income-focused investments.
• Capital appreciation: The REIT model allows small investors to benefit from the long term capital growth typical to real estate, without a large initial outlay.

On the downside, REITs come with a number of risks:

• Interest rates: Rising interest rates generally have a negative effect on a REIT’s performance, because it drives up their cost of capital. Overall investor demand may also reduce at such times because higher rates make fixed-income investments more attractive.
• Concentration: Some REITs may concentrate their portfolio on a few large assets or a single sector, leading to higher risks. For example, a number of REITs were forced to write down the value of their office assets after the pandemic prompted businesses to encourage work-from-home or hybrid model for employees, reducing property demand.
• Limited capital growth: As part of their structure, REITs typically pay up to 90% of their income back to investors, leaving limited scope for reinvestment into new holdings. As a result, REITs don’t offer much in terms of capital appreciation except during up-cycles in the property market.
• Market volatility: Because REITs are publicly traded, they are subject to the same market volatility as stocks. As an asset class, real estate can also be sensitive to macroeconomic factors and market cycles, impacting returns when the market environment worsens.

REITs provide exposure to the property market which may be otherwise difficult to access for small investors. They also offer steady distributions that are often attractive to income-focused investors. However, REITs may not be suitable for every investor, so it is important to consider a few parameters before investing in one:

Payout ratio: The dividend payout ratio calculates the proportion of a company’s profits that are paid out as dividends. This is a key factor in case of a REIT, especially for investors looking for a regular income stream.

Growth in earnings: REITs typically generate earnings growth through higher occupancy rates, increasing rents, lower costs, and new business opportunities.

Investment Strategy and Fees: Investors should consider the strategy of the REIT, its mix of assets, concentration in any particular sector or geography because these are indicators of potential profitability. Similarly, the percentage of management fees charged will determine the returns for shareholders.

Management track record:As with any other managed fund, investors should look at the track record of the REIT’s management team for clues about their past success. It is also important to consider how the management is compensated.

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In Australia, listed REITs or A-REITs are publicly traded, so investors can purchase their shares through a stock broker, investment platform or an online trading platform. The minimum initial investment for an A-REIT is $500.

Currently, there are 42 Australian REITs and four international property REITs listed on the ASX. Some of these include company-level REITs such as Scentre Group, Goodman Group, Charter Hall or Mirvac.

In addition, investors can also gain exposure to REITs through property-focused exchange traded funds, or ETFs, such as Vanguard Australian Property Securities Index ETF or VanEck Property ETF.

You can buy shares of a non-traded REIT through a broker or financial advisor who participates in the non-traded REIT’s offering.

Investment may also be possible in some private REITs. However, these real estate funds are exempt from registration with the Australian Securities and Investments Commission (ASIC), and hence may only be available to institutional investors.