REITS what are they and how do they work?

When most people think about investing in property they tend to think about residential homes or commercial properties such as shops, offices or industrial buildings. But there is another way to invest in property through listed property securities often referred to as Real Estate Investment Trusts (or REITS) globally and Australian Real Estate Investment Trusts (A-REITS) here in Australia.

REITS are companies that own and manage property on behalf of their shareholders. The properties that typically make up a REIT portfolio may include retail property such as shopping centres and commercial shops and buildings, medical centres and healthcare facilities as well as industrial facilities, office buildings and self-storage properties.

For many investors, the major draw card for investment in REITS is the ability to gain exposure to the commercial property market without the requirement to buy and manage properties directly. This money is then pooled with other investor’s money and used to purchase a portfolio of properties that are professionally managed by a team of property specialists.

REIT investments aim to typically provide investors with returns in the form of capital gains and dividend (rental) income. Their benefits include diversification via non-residential property investment and access to a professionally managed portfolio of properties.

A-REITS are a unitised portfolio of property assets that are listed on the Australian Stock Exchange. The A-REIT market is relatively small with a selection of less than 50 trusts to choose from.

The main benefits of A-REIT investments are:

  • Potential for capital growth
  • Receipt of a regular income (distributions)
  • The ability to invest in property with small amounts of investment capital or savings
  • Liquidity (compared to direct investment in physical property)
  • Diversification through investment in multiple properties and other types of property assets.

However, with every investment there are certain degrees and types of risk involved, these risks may include but are not limited to:

  • Potential for capital loss
  • Liquidity risk
  • Lack of diversification of property assets also referred to as concentration risk. Some A-REITS hold just one single building or property investment in a single city or state. This can represent a higher risk than an A-REIT portfolio that invests in many properties located over a geographical spread
  • Risk of fluctuations in income returns (distributions) if the rent is not paid, there is a loss of tenants or if tenancy agreements are renegotiated lower.

Now that you have been given a brief insight into what REITS are and how they work if you’d like to learn more, then be sure to read our article on things to consider when investing in property or discuss with your financial adviser. And remember, whether to consider REITS as part of your investment strategy, as with any investment, will depend on your existing financial situation, goals and objectives and risk tolerance.