What are REITs and what can you invest in?

A-REIT (An Australian Real Estate Investment Trust) is a unitised portfolio of property assets.It is similar to stocks and trade, listed on the Australian Stock Exchange (ASX). Individual Investors can invest in real estate investment trust in a variety of different ways. We break down exactly what a REIT is, type of REITs and pros and cons.

What is a REIT & How to invest in REITs?

A REIT is a diversified and professionally managed portfolio of real estate assets that enables investors to access a property portfolio which may include commercial, industrial, retail or a mix of these real estate assets which would not otherwise be available to the individual investor.

Investors invest in REITs mainly for two reasons - higher income and long-term growth.

REITs also help investors diversify their income streams, as they are an alternative to direct property investment and can be used to provide portfolio diversification.

This type of investment allows large and small investors to own a share of real estate.

For example, X company, as a premium real estate property group on CrowdfundUP, qualifies as a REIT. It purchases an office building and rents out office space with the funds generated from investors. X Company own and manages this real estate property and collects rent every month from its tenants. Thus, X company is considered an equity REIT.

On the other hand, assume Company Z qualifies as a REIT and loans out money to a real estate developer. Unlike Company X, Company Y generates income from the interest earned on the loans. Therefore, Company Y is a mortgage REIT.

5 Types of Investments into REITS

There are 5 types of REIT's - with the main 3 being equity REITs, mortgage REITs, and hybrid REITs. In this blog post, we’ll discuss these REITs in detail.

1.Equity

Equity REITs are commercial real estate companies that purchase commercial properties and let them out to generate income.
The companies acquire commercial properties including shopping centres, hotels, office complexes and apartments.

2.Mortgage

Mortgage REITs usually offer the greater yields because they usually are saddled with the greater risk.

3.Office

Office REITs invest in office buildings. They receive rental income from tenants who have usually signed long-term leases.

4.Residential/Apartment

Residential REITs are Equity REITs that own and manage various forms of residences. Residential REITs rent space in these properties to tenants, own and operate multi-family rental apartment buildings as well as manufactured housing.

5.Hybrid

Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages.

Some trusts adopt hybrid structures called ‘stapled securities’ funds.
Stapled securities A-REITs provide investors with exposure to a funds management and/or a property development company, as well as a real estate portfolio.

The Advantages and Disadvantages of Investing in REITs

We have discussed the advantages and disadvantages of investing in Australian Real Estate Investment Trust (REITs) to understand below.

Pros

For the sophisticated investor, there are distinct advantages to owning stock in a REIT

・Simplicity of Investment

You do not need to know everything about the investments; a professional team take care of all the operational work. They handle all of these tasks on your behalf, along with many other investors.

・Higher dividend

REITs are required to pay out at least 90% of their income as a dividend

・Diversification

REITs help diversify an investment portfolio. Because real estate prices aren’t correlated to stock prices, stock prices and real estate values can move together or in completely opposite directions.

・Return on investment

Compared to the stock market, REITs typically offer above-average returns and those returns may grow as the properties see value appreciation over time.

・More Liquidity

It is much easier to sell your stocks in a REIT than it is to sell a physical building. You’ll just need to accept the current “going rate,” which is determined by the unique market conditions at a given point in time. If you feel like getting out, you simply sell your shares to a someone interested in purchasing.

Cons

Now, let’s discuss some of the risks associated with investing in REITs.

・Lack of control

You are relying on the REIT company to make all investment decisions on your behalf.
Trust managers may make decisions concerning your commercial property you disagree with. And if a downturn happens, you can’t personally take any actions to protect your investment.

・Growth is at a slower pace

REITs generally exhibit low growth since they must pay 90% of income back to investors but it can reinvest a maximum of 10% of their annual profits back into their core business each year.

However, the relatively small amount left over makes it difficult for REITs to grow without forcing managers to take on debt.

・Tied to the real estate market

REITs are tethered to the real estate market. Rising vacancy rates, lower rent prices and other variables will all affect the success of your REIT investment.

Your dividends are not guaranteed, meaning any hit to the commercial real estate market will be a blow to your pockets as well.

Investing in REITs vs Real Estate crowdfunding Platforms

Whether single crowdfunded real estate investments or REITs are best for you is a matter of personal preference.
Crowdsourced finances single projects, whereas a REIT, is more like investing in company stock.

REITs typically invest multiple large real estate projects, and investors in REITs collect dividends based on the net profitability of all the investments in the trust.

If you want to invest in single projects that are easier to understand and monitor, you might prefer investing in real estate crowdfunding projects.
But if you want to invest in a conglomerate of large investment ventures, you might prefer investing in a REIT.

REITs offer more stability, but at the cost of choice and possibly lower profits.

Property Crowdfunding platforms, on the other hand, can offer more investment opportunities with the possibility of higher profits

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The information in this article is general in nature. Any advice it contains is general advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person.
The article content is not intended to be a substitute for professional advice and readers are urged to seek their own appropriate advice before making decisions.

Any reference to a particular investment is not a recommendation to buy, sell or hold the investment.

Oct 04. 2017 CrowdfundUP