Owning your own home or an investment property isn’t the only way to gain exposure to property. A real estate investment trust (REIT) can be an effective way to dip your foot into the market.
REITs are publicly listed pooled investments. The funds are used to buy all kinds of property, from offices to apartments and hotels.
Like any publicly listed security, REITs can trade at a premium or discount to the underlying value of the assets, measured as net tangible assets (NTA). So, if the market is booming, the REIT can trade for more than what its underlying assets are worth, and vice versa.
Because they’re publicly listed and frequently traded, they provide highly liquid exposure to property – much more liquid than owning an investment property yourself.
Real estate assets pay their owners rent. This means a regular yield for investors, usually in the form of monthly or quarterly distributions.
But REITs can also provide capital growth. If the price investors are willing to pay for a REIT increases, then existing investors can realise a capital gain.
Finally, REITs offer investors an added layer of diversification. This can be both within and across asset classes. Diversification from within the asset class can be achieved by holding investments in different sectors, such as industrial and retail, while diversification across classes is achieved by holding an asset that is qualitatively different from others.
Assess the risks
REITs share many of the same risks as other listed investments. Some are susceptible to concentration risk if they’re overly invested in one sector. In Australia, concentration risk can be a problem because most of the REIT market is invested in office and retail space. In addition, the top five A-REITs account for almost 60% of the market.
There is also interest rate risk. At some point central banks will raise interest rates, and that will hurt investment in real estate. But that applies to almost every security that people buy money for.
Then there’s the usual volatility that can affect REITs, as it can with any listed security.
Australia bounces back
The Aussie REIT sector is valued at about $133 billion, split between retail assets (about 55%), offices (20%) and industrial assets (20%). The other 5% is made up of residential and other niche property assets.
The A-REIT market has bounced back strongly since the Covid crash with a 10.5% return during the June quarter and 33% for the 2021 financial year. Still, this is about 5% down on pre-Covid levels.
The sector is trading at about a 90% premium to net tangible assets, due to the increasing involvement of fund managers.
Investors who want stronger returns and greater diversification might be well served by looking overseas.
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