What are real estate investment trusts (REIT)

Aside from buying property outright, there are other ways to invest – and make money – in real estate.

One such way is through a real estate investment trust (REIT), sometimes referred to as an A-REIT in Australia, which is a company that owns, operates, or finances income-generating real estate.

REITs pool the capital of numerous investors, offering a way for individuals to gain exposure to property investments without needing to find, buy, manage or finance an actual property themselves.

What are REITs and how do they work?

A REIT is an investment fund, like a mutual fund, that owns a range of income-producing properties in a portfolio. They pool the resources of numerous, unrelated investors to buy a range of property assets in a variety of asset classes.

They’re a way to gain exposure to property investments without needing to purchase and then manage the actual property to earn money.

Dr Diaswati Mardiasmo, the chief economist for PRD, said a REIT generates most of its income through rent, which is divided among investors via dividends.

Income can also be created through the capital growth of assets, property development, and property-related fund management earnings.

Dr Mardiasmo explained REITs are managed by a fund’s management team, which collates a portfolio of asset classes on behalf of investors.

There are two main types of REITs: equity REITs and mortgage REITs. A hybrid of the two can also be used.

Equity REITs

Equity REITs invest in and own properties.

“This form of investment generates income through the leasing of their properties and collecting rent. Funds management teams often invest in a variety of asset classes, including residential and commercial properties,” Dr Mardiasmo said.

Mortgage REITs

Mortgage REITs involve the investment and ownership of property mortgages and loan money to the owners of real estate for mortgages or mortgage-backed securities and generate income through interest paid on the loan, she said.

Are REITs a good investment?

Every REIT is different, which means results differ. So whether a particular REIT is a good investment or not differs from case to case.

Each REIT is controlled by a fund management team, which means investors get the benefits of investing, without the negatives of managing an investment property, Dr Mardiasmo said.

“As they must distribute at least 90% of their income to investors in the form of dividends, they can attract investors looking for income-oriented investments,” she said.

“REITs can outperform equity index funds, with a higher annual return and lower volatility than traditional stocks, which can become an appealing option for investors looking to diversify their portfolios.

“These types of funds also enjoy greater liquidity than most property investments, as the trusts trade publicly on the stock exchange,” Dr Mardiasmo said.

Does this mean I can buy property with no money?

Investors still need money to get into REITs.

“You don’t need the amount of money you would traditionally need to purchase a property investment yourself. You won’t need to think about having a 20% deposit, paying for stamp duty, legal fees, build and pest fees, lenders’ mortgage insurance, and any other costs associated with purchasing a property,” she said.

But capital is still needed.

“The main benefit is they provide a means of investing in the property market to individuals who otherwise wouldn’t have had enough money to do so, as the funds of investors are pooled together. This means that the minimum initial investment required for an A-REIT is usually no more than $500,” Dr Mardiasmo said.

What is the average return on a REIT in Australia?

Dr Mardiasmo said the average return for REITs, between November 2017 and November 2020, was 11.25%. “This was well above both the S&P 500 and the Russell 2000, which clocked in at 9.07% and 6.45%, respectively,” she said.

Between 2010 and 2019, A-REITs returned 11.6% each year, mainly from income.

“And according to UBS data, over the past 20 years, A-REITs have delivered an average return of 9.6% a year, including an average distribution yield of 6.9% each year. The income that investors received is almost 50% higher than equities over this period.

“However, much like the share market, COVID-19 has hit A-REITs significantly due to a high level of uncertainty,” she said.

One of the major risks for property investors is vacancies and COVID may cause these through business bankruptcies. The retail property sector is at the epicentre of this risk.

“That said, A-REITs have rebounded, delivering positive returns for the 2021 financial year. The strong rebound has been led by the industrial sector, with the boom in e-commerce fuelling demand in warehousing, storage, and logistics facilities.

“The S&P/ASX A-REIT 200 Index returned 31% in the 2021 financial year, outperforming the broader market index (S&P/ASX 200 Index) by 7.1%. Overall, A-REITs have been such a resilient sector over the years because they always know how to reinvent themselves and how to best mitigate risk,” Dr Mardiasmo said.

How much money do I need to invest in REITs?

How much money an investor needs to invest in a REIT depends on the type of property or asset. Each provider has its own products and prices.

“Generally though, the minimum initial investment for an A-REIT is $500. In comparison to the cost of an investment property, a REIT assists in gaining the benefits of investing into property, with the fluidity that comes with the stock market,” Dr Mardiasmo said.

How do I start investing in REITs?

REITs are listed on the ASX, so they can be bought and sold through a broker, in the same way as shares.

“Often A-REITs can be transacted online, with an easy step-by-step process on the website. Although this may seem easy enough, seeking independent advice from an account or financial planner is advised.”