The complete guide to understanding REIT’s
Not everyone knows what a REIT is and what exactly they do. So I decided to do a little research and prepare the complete guide to understanding REIT’s. If you have any questions left unanswered at the end of reading this, please comment and I can included your questions!
What is a REIT?
A REIT or real estate investment trust – is a company, which has been established for investing in real estate – being apartments, houses, hospitals, shopping centres, hotels and apartment buildings.
What are the types of REIT’s?
There are two broad types of REIT’s –
- Equity REIT
- Mortgage REIT
Equity REITs, providing investors with the opportunity to invest in portfolios of income-producing real estate. These companies’ own properties in a range of real estate sectors that are leased to tenants, such as office buildings, shopping centers, apartment complexes and more. They are required to distribute a minimum of 90 percent of their income to shareholders in the form of dividends. This is certainly the case in Australia, from the list of ASX listed REIT’s available below, they are all equity REIT’s.
Mortgage REITs(mREITS) provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities (MBS) and earning income from the interest on these investments.
What is the structure of REIT’s?
A REIT structure can be either Public traded, public non-traded, private. These are explained as follows:
Public traded- those, which can be bought and sold on a stock exchange. Public non traded reduce or eliminate tax while providing returns on real estate. A non-traded REIT does not trade on a securities exchange and because of this, it is quite illiquid for long periods of time
Public Non Traded– These terms are more relevant to the American market. Non traded REIT’s aree SEC-registered offerings so are therefore required to adhere to the Securities Acts. A broker or dealer will manager the purchase and sale process and will generally front load the commission they earn reaching between 10-15% of the purchase value. Liquidity of these non traded REIT’s are limited as they are not listed or traded on an major security exchange.
Private- Private REITs are real estate funds or companies that are exempt from SEC registration and whose shares do not trade on national stock exchanges. Private REITs generally can be sold only to institutional investors. Again this term is mainly from the American market.
Why were REIT’s created?
Originally President Eisenhower developed the REIT’s in the US in the 60’s. Since then they have exploded around the globe to now be in 35+ countries, around 477 different stock exchange traded REIT’s. The first REIT in Australia was called General Property Trust (GPT) and was listed in 1971. GPT is still around today.
REITs offer investors a simple way to invest in large commercial investment opportunities they would otherwise not be able to access. In turn, the rental yields delivered by these real estate assets both underpin the asset value of the REIT, and are also (due to the unique taxation structure of REITs) passed on as distributions to investors on a pre-tax basis.
What are the Australian REIT’s which are available to investors?
Below is a list of some A-REITs listed on the ASX:
|AAD||Ardent Leisure Group||Equity REIT||Diversified, Specialty|
|ABP||Abacus Property Group||Equity REIT||Industrial, Office, Retail, Self Storage|
|ARF||Arena REIT||Equity REIT||Health Care, Specialty|
|BWP||BWP Trust||Equity REIT||Retail|
|BWR||BlackWall Property Trust||Equity REIT||Office, Retail|
|CDP||Carindale Property Trust||Equity REIT||Retail|
|CIP||Centuria Industrial Reit||Equity REIT||Industrial|
|CLW||Charter Hall Long Wale REIT||Equity REIT||Industrial, Office, Retail|
|CMA||Centuria Metropolitan REIT||Equity REIT||Industrial|
|CMW||Cromwell Group||Equity REIT||Retail, Office, Industrial|
|CQR||Charter Hall Retail REIT||Equity REIT||Industrial, Office, Retail|
|CRR||Convenience Retail REIT||Equity REIT||Retail, Specialty|
|DXS||DEXUS Property Group||Equity REIT||Industrial, Health Care, Office, Retail|
|FET||Folkestone Education Trust||Equity REIT||Specialty|
|GMG||Goodman Group Ltd.||Equity REIT||Industrial|
|GOZ||Growthpoint Properties Australia Ltd.||Equity REIT||Industrial, Office|
|HPI||Hotel Property Investment Ltd.||Equity REIT||Hotel, Retail, Specialty|
|IDR||Industria REIT||Equity REIT||Industrial|
|INA||Ingenia Communities Group||Equity REIT||Residential|
|IOF||Investa Office Fund||Equity REIT||Office|
|LEP||ALE Property Group||Equity REIT||Specialty|
|MGR||Mirvac Group||Equity REIT||Retail|
|NSR||National Storage REIT||Equity REIT||Self Storage|
|RFF||Rural Funds Group||Equity REIT||Specialty|
|SCG||Scentre Group||Equity REIT||Retail|
|SCP||Shopping Centres Australasia (SCA Property Group)||Equity REIT||Retail|
|SGP||Stockland Corporation Limited||Equity REIT||Industrial, Residential, Office, Health Care, Specialty|
|URF||US Masters Residential Property Fund||Equity REIT||Residential|
|VCX||Vicinity Centres Ltd||Equity REIT||Retail|
|VVR||Viva Energy REIT||Equity REIT||Retail, Specialty|
|WFD||Westfield Corp Ltd||Equity REIT||Retail|
What are the Pro’s and Con’s of a REIT?
From the research we have performed, the following are the pro’s and con’s:
Liquidity – Very easy to buy and sell similar to stocks on an exchange market. Diversification – Investors love having these in their portfolio as they have a very low correlation with other types of investments.
Transparency – Given REIT’s are regulated; they are required to prepare audited financial statements that are accessible to investors.
Dividends – REIT’s pay regular cash dividends and even provide options for DRP or DRIP reinvestment.
Performance – Very competitive performance.
Fees – Depending on the particular REIT, they may have high fees associated.
Low growth – In the US REIT’s generally pay 90% of income back to investors.
Taxes – In the US REIT’s are taxed as regular income.
Market Risk – There is still a risk of poor performance.
Are REIT’s a good investment?
The answer is it depends on your personal situation, Yes REIT’s can be a very good investment but they can also be a bad investment.
How to invest in REIT’s?
This depends on the type of REIT that you are interested in, if they are trading publicly then it is very easy to invest as you just need to know the ticker code and you can purchase through your stockbroker. If they are a private REIT then you need to contact that REIT directly and they will give you the online forms to enter into.
Are REIT’s liquid?
If the REIT you have selected is publicly tradable then yes it is highly liquid, however if you have selected a private REIT when you go to sell there may not be a market that is easily assessable to sell your product. Hence you need to ensure you do your research first on the type of REIT that you are selecting.
What are the features of REIT’s?
The features of a REIT depend on the type of REIT. For a publicly tradable REIT the features are as follows:
Large dividends– particular in the US they pay out most of their profits through dividends so you can receive a dividend which is much higher than competing investment types.
Very liquid – Publicly listed REIT’s are easy to buy and sell.
Diverse – Investors love REIT’s because of their very low correlation to other stocks, bonds etc. You can include them in your portfolio to minimize risks.
Transparency – Due to the fact that public REIT’s disclose their financial statements, the investors get to understand where their money is and how it is performing. If things start to go pear shaped, they are able to see it happening in the numbers.
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