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For a nation hooked on real estate, investment trusts provide valuable diversification and liquidity

- DAVID THORNTON

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.