Investing In Property Without Investing In Property

Real Estate Investment Trusts (REITS)

Property investing can still be done without the need for actual ownership. Instead, investors could invest in companies that own serious portfolios of self-appreciating property assets located in some of the world’s most desirable locations.

In this article, we’re going to briefly cover Real Estate Investment Trusts, which are also known as REIT.

What Are They?

A REIT is a company that owns, operates, or finances income-generating real estate. This makes it possible for individual investors to earn dividends and/or capital gains from real estate investments — without having to buy, manage, or finance any properties themselves.

Similar to an individual investing in stocks registered on the stock exchange, investors have the chance to acquire shares in a REIT, giving the average individual the ability to expose their portfolio to real estate markets.

REIT’s are commonly split into three types:

Equity REITs

Equity REITs tend to own a wide portfolio of different properties, these could include warehouses, offices, art galleries, hotels, showrooms, luxury homes, and much more. These REITs earn most of their revenue from the rental income generated on these properties.

Mortgage REITs

These refer to organisations that earn interest on loans provided to companies and individuals to purchase real estate, as you’d imagine, the main revenue stream would be derived from interest on loans.

Hybrid REITs

These would involve companies that own, rent, and manage real estate, whilst also providing loans to other companies and individuals, simultaneously earning interest on loans provided.

All the above types of REITs are listed on the stock exchange allowing individuals to own shares in such companies. REITs can also be publicly non-listed or private, but since we can’t get our hands on a private company, we’re going to focus on the publicly-traded REITs.

Recognition

For a company to be considered as a REIT, the entity must meet a list of criteria set out by regulators. As an example, in the United States, for an organisation to be considered a REIT, the company must:

• derive 75% of its income directly from real estate;
• hold a total asset base that comprises 75% real estate; and
• generate 95% passive income.

These rules and regulations could vary depending on location and jurisdiction. With that being said we’re not going to focus on this area too much.

How Can Individuals Invest In REITs?

1. Investors could purchase shares in an individual company that is registered on the stock exchange as well as a mutual fund;
2. Investors could invest in exchange-traded funds (ETFs)that are designed to track the movement of a basket of companies listed on the stock exchange, or perhaps an underlying index; lastly
3. Investors could also opt to invest in non-publicly traded REITs through brokers or financial advisors.

Pros and Cons to Investing In REITs

REITs can play an important part in an investment portfolio because they can offer a strong, stable annual dividend and the potential for long-term capital appreciation.

REIT’s total return performance for the last 20 years has outperformed the S&P 500 Index, other indices, and the rate of inflation (1–3% annually).
Source — Investopedia.

Pros

Liquidity

Unlike the local property market, REITs are registered on highly liquid stock exchanges, meaning that a person could sell their interests in their investments in seconds, not months or years.

Appreciation & Dividends

REITs tend to have strong cash flow generated from the rental of their real estate. This often translates into dividends passed on the stockholders, as well as capital appreciation.

Diversification

You don’t need to physically own property to diversify your portfolio and get exposure to the real estate market but rather can get exposure to companies that own properties in the most attractive areas of the world. That in itself poses a great opportunity.

Cons

Slow growth

If you’re investing in a REIT expect slow, yet relatively stable growth. REITs have had a steady winning streak over inflation and the S&P500 over the past 20 years, making them good investments. However, one cannot expect to see similar gains to those recognised in say, the tech sector.

Potential for high management and transaction fees

If you’re investing in an actively managed ETF, mutual fund, or non-publicly traded REIT, then you need to consider the management fees that are going to be incurred when it comes to the sale of your investment.

If you have no time or knowledge to look into each individual investment, you may want to leave it in the hands of a professional advisor or portfolio manager.

REITs that we like

(and you might want to check out)

SEGRO

SEGRO is a real estate company in the logistics space. They make their money by renting out logistics-related properties and developing new properties to rent out. Logistics properties are ones related to the distribution of products, something heavily needed as consumers shift towards online retailing. An example of a customer might be Amazon, which would rent out a huge warehouse as a hub to store their goods and distribute them from there.

Aroundtown

Operating with a fully integrated real estate value chain, Aroundtown targets value creation opportunities from repositioning properties. Aroundtown picks quality cash-generating properties with upside potential in rent and/or occupancy increases. The main investments that around town caters for includes the acquisition of hotels and also office spaces.

Vonovia

Is a real estate company located in Germany. The company mainly focuses on residential properties and currently owns around 400,000 apartments in Germany, Sweden, and Austria, making it a significant market player in these countries.