REIT’s, or Real Estate Investment Trust’s, are funds that invest exclusively in a wide range of property, consolidating all of its holdings and listing shares in the fund so that you and I can buy into them. That’s the gist.
If you’ve ever wondered who owns the large shopping malls and prime real estate in city centers, chances are that some, if not most of it, is owned by a REIT. Traditionally, these large malls and office buildings were developed by pension funds who had to diversify their own portfolios, but these days its easy to get access to those properties by simply doing a bit of research on a REIT, finding the one that holds your most-desired properties and buying into them!
Here is an example of Growthpoint’s retail property holdings: https://growthpoint.co.za/retail/
REIT’s also invest in a number of other sectors, such as industrial properties like logistics warehouses, office buildings and in the US, even in homes. As of writing this article, it is estimated that over 150 million Americans live in homes financed by REIT’s.
The advantages of REIT’s
There are a few. Primarily, the biggest advantage that you and I have is that we can gain access to prime real estate that we would not normally have access to invest in, by buying into the funds that own the properties. Those property portfolios are also well diversified, which lowers our risk, both in terms of investment and returns. Another big advantage with REIT’s is that, as they are listed, it makes them very easy to buy and sell. Anyone that has ever bought or sold a home knows what a lengthy and complex process it is to sell a home, however with REIT’s, it’s as simple as buying and selling shares.
Finally, fees. If I were to buy a home now, I’d pay about 5% – 7% in agents commission, as well as 5% on transfer fees and depending on the price window the property falls into, perhaps even a ton of taxes. With REIT’s, those fees were already paid for when the fund acquired the properties, so by the time you and I buy into them, the only fees we have to worry about is our share trading fees.
While REIT’s do have management structures, the fees associated with those are deducted from the rental income those REIT’s generate, after which point, the REIT distributes the blended rental income to their shareholders, either quarterly, every 6 months or annually.
The disadvantages of REIT’s
For one, you will have to buy into a REIT that already holds a wide range of property, you do not get to decide exactly what goes into the portfolio. But that’s a minor disadvantage. The biggest drawback of a REIT is that is does not leverage property as explained by this article, meaning your returns will always be a bit bland, generally anything from 5% – 10% per year. In contrast, if you’re serious about property investing, leveraging your investments is the only real way to do it.
Another disadvantage is the risk that comes with all property ownership, and that is large-scale vacancies. Think to just 2 years ago (2021) when covid was in full swing and people started working from home and shopping malls were forced closed for weeks if not months on end. That caused large-scale vacancies in retail and office space as businesses started to fail, leading to reduced income for investors and consequently, the share prices of REIT’s deteriorating as investors switched their money to more lucrative investments. So your investment in a REIT can deteriorate just like the price of a share in a normal company.
So why buy into REIT’s?
Generally, it offers good portfolio diversification, which is what one wants in long-term investments. That is why almost all retirement accounts require that a certain percentage of the account’s money be invested into property, and this is primarily done through REIT’s.
Apart from that, it’s generally a bit boring, something you buy and hold and sort-of forget about, maybe review every 2-3 years and rebalance if necessary.
Yawn, I know. But that’s your overview on investing into property through funds!