Real Estate Investment Trusts (REITs)
An Australian Real Estate Investment Trust (A-REIT) is a unitised portfolio of property assets, listed on the Australian Stock Exchange (ASX). They are an alternative to direct property investment and can be used to provide portfolio diversification.
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.
REITs may either invest in property locally in Australia or internationally. Investors can gain the benefit of any increase in value in the underlying asset and from regular rental income generated from the properties owned.
Before March 2008 REITS were called Listed Property Trusts (LPT) and first emerged in the Australian sharemarket in the early 1970s. They were viewed as low-risk and stable investments relying mainly on rents to provide reliable income. They were also considered a substitute for direct property investing as they offered easier liquidity and a chance to own part of a large range of properties and areas not easily achieved by the smaller investor. Later some companies changed their mandate and moved into development, investing offshore and financial engineering to boost their earnings growth.
When looking for suitable REITs in which to invest, the main consideration will need to be based on your needs for income and/or capital appreciation.
A suggested checklist is provided to help you do your own research:
- Compare returns – don’t necessarily look at the highest returns, but consider consistent returns over long periods.
- Management – who are the managers and do they have a good reputation, how long have they been in the business?
- Types of investment – what are the underlying risks of the types of investments that the REITs hold?
- Liquidity – does the REIT trade regularly and in sufficient size for you to be able to enter and exit if and when you need to?
- Franking credits and distributions – what is the nature of the distributions and are there any franking credits attached, how much of the distribution is tax deferred?
- Volatility – how volatile is the price of the REIT, can you tolerate any volatility in the share price?
- Valuations – how often are valuations undertaken and how conservative are the current valuations, what are the downside risks as far as valuations are concerned?
- Gearing- how heavily geared is the REIT?
The ASX provide good coverage on REITs:
Explore About REITS for information on the categories of REITs and also a section on the benefits and risks of investing in this type of asset.
Visit their REITS page here to view videos and interviews and other relevant information.