Reading 2021-11-01

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Notes from reading

REITs allow investors to get a slice of the property pie without a massive down payment

REITs, or real estate investment trusts, provide investors exposure to the property market through their stock portfolio. Similar to managed funds, REITs are actively managed and pool together investors’ money to invest in properties.

two main types of REITs

  • Equity REITs: more common of the two, equity REITs invest in and own properties. Typically, equity REITs generate their income through leasing out their properties and collecting rent.
  • Mortgage REITs: involved in the investment and ownership of property mortgages. These types of REITs loan money to the owners of real estate for mortgages or mortgage-backed securities. Typically, mortgage REITs generate income through the interest paid on the loan.

Benefits of REITs

  • REITs offer investors instant access to a large property portfolio for a small upfront investment and may also offer diversification across property sectors, geographical locations and asset types.
  • Through REITs, investors are able to earn a share of the income generated by tenants and capital growth, without having to purchase the physical property
  • provide a sustainable income stream, with monthly or quarterly distributions underpinned by regular rental income
  • REITs are traded on the stock market, like shares. Therefore, REITs are typically a highly liquid asset, particularly when compared to traditional real estate investing.

Risks of investing in REITs

  • REITs aren’t riskless investments as all real estate can be sensitive to macroeconomic factors and market cycles
    • underlying assets like shopping centres may have high levels of debt, can lose major tenants or be poorly managed
    • The recent COVID lockdowns showed how susceptible office properties can be to staff working from home while increased on-line shopping and weak retail discretionary spending activity can have a big impact on retail rental conditions and demand for hotel rooms.
  • While most REITs allow investors to diversify their portfolios, this point can be oversold given that some REITs concentrate exclusively on a few large assets or a single sector, leading to higher risks
  • Another potential risk occurs when REITs borrow funds to buy or develop a property portfolio, creating high levels of gearing. While gearing can multiply capital gains when asset values rise, it can also multiply losses when they fall, as well as creating higher interest costs.
    Similar to a managed fund, it is vital that investors do their due diligence and examine the management team behind the investment. Be sure to look at the level of debt a trust holds.

Be sure to check the dividend payout ratio. This ratio calculates the proportion of a company’s profits that are paid out as dividends.