28 Aug Investing in REITs (Listed Property): A guide for Investors

What are Real Estate Investment Trusts (REITs)?

REITs or real estate investment trusts, are listed securities that own, operate or finance income-producing real estate. This can include office towers, hotels, shopping centres and warehouses. As rates go up, the return on these assets becomes less attractive but as rates come down they provide good relative income as well as capital growth. REITs provide an investment opportunity that makes it possible for everyday investors to benefit from valuable real estate. Examples of REITs include property developer, Mirvac Group and Scentre Group, which manages over 40 Westfield shopping centres.

Why invest in REITs?

REITs offer investors immediate exposure to a large-scale property portfolio, for a small upfront investment.

In contrast to purchasing property directly, REITs are highly liquid and traded on exchange easily, like ordinary shares. Investors are drawn to REITs primarily for their regular income, potential for capital appreciation and for portfolio diversification.

Listed real estate offers investors the opportunity to access the commercial real estate market with the added liquidity, transparency and regulation associated with investing in publicly traded stocks.

Types of REITs

The main REIT subsectors are:

Retail REITs
Typically refers to shopping centres in capital cities and regional areas, as well as freestanding shops like Bunnings.

Office REITs
These REITs own properties used as offices and include CBD office towers as well as suburban and regional office parks.

Industrial REITs
Includes warehouses, manufacturing buildings, industrial parks and multi-use buildings.

Residential REITs
Includes the development and ownership of land and apartments.

Diversified REITs
As the name suggests diversified REITs own and manage a mix of property types; they do business in two or more REIT subsectors.

Specialised REITs
These are A-REITs which are not engaged in any of the traditional REIT subsectors, for example Data Centre REITs.

What are the benefits and risks of investing in REITs?

REITs offer four key benefits sought after by investors:

A reliable income stream
REITs generate income by leasing space and collecting rent on their real estate, which is then distributed to investors as dividends. Investors earn dividends from real estate holdings without the challenges and capital required to purchase, manage or finance properties independently.

Inflation protection
In many countries, rents charged by REITs to tenants are often linked to inflation. Therefore, the income that flows through to investors offers a certain level of built-in protection against rising prices.

Potential for capital growth
Investors turn to REITs typically for their defensive qualities, as they derive a high proportion of their returns from income rather than capital growth. Nevertheless, it’s important to recognise that REITs also present the potential for capital appreciation.

Diversification benefits
Including an allocation to REITs in an investment portfolio typically carries diversification benefits, thanks to the historically low correlation between property and traditional asset classes.

Like any investment, there are risks to investing in REITs including:

Concentration
It’s important for investors to ensure that they attain a well-diversified exposure to REITs. Some REITs are reliant on a specific sector or a few large assets, posing heightened risks for investors.

Market cycles
The performance of real estate is responsive to changes in macroeconomic conditions, impacting investors’ returns during market downturns.

Volatility
Movements in the broader share market can impact REITs, leading to heightened levels of volatility compared to direct property investments. The market value of a REIT may not consistently reflect the net asset value of the underlying property portfolio. This is both a risk and an opportunity.

Interest rates
Increasing interest rates can adversely impact the performance of REITs. This occurs because access to credit becomes more expensive, as well as through higher interest costs, and fixed-income investments becoming more appealing, which can reduce overall demand for REITs.

How to invest in REITs

Since REITs are publicly listed, they can be purchased and sold directly on exchanges like the ASX through your broker. However, picking individual REITs to invest in can be risky. It can be difficult to predict which REIT and which REIT subsector is going to perform best.

A diversified way to access the REIT sector is using an ETF (Exchange Traded Fund). ETFs offer liquid, affordable and efficient exposure to property.

Global REITs

Global REITs (also known as G-REITs) are REITs that are listed outside of Australia. Some of the world’s largest REITs include American Tower Corporation, Prologis and Reality Income Corp.

Nearly 40 countries now offer REITs, the US being the largest, according to Nariet, the worldwide group representing REITs and publicly traded real estate companies.

Australian REITs

Australia was one of the pioneers of listed real estate investing. General Property Trust was the first Australian Listed Property Trust (LPT) in 1971. LPT’s were subsequently renamed REITs (Real Estate Investment Trusts) in line with international practice. Australian REITs are now commonly known as A-REITs (pronounced A-REETS). These are REITs listed on an exchange based in Australia, like the ASX.

Despite being early innovators, Australian REITs only comprise around 3% of the world’s listed real estate assets. Looking overseas presents real estate opportunities not readily available on Australian shores, including REITs in healthcare, lodging and resorts and data centres.

Australian Real Estate Outlook

The current macroeconomic environment, characterised by elevated inflation and low growth, has historically been an environment where REITs have outperformed. The asset class provides inflation-linked revenue streams including exposure to subsectors with inelastic demand, making them attractive at a time where global economic activity is subdued.

Return of migration and the housing shortage are driving rental inflation. The Reserve Bank of Australia (RBA) is expected to take a tempered approach to any future cash rate changes, while it considers the mortgage strain already experienced and expected for households as more roll off their fixed-rate mortgages. These components bode well for A-REITs.

This article was originally produced by Russel Chesler and Cameron McCormack from VanEck. You can read the full article here.

Important information and disclaimer

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.

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