The ins and outs of investing in REITs

Investing in REITs can be a valuable addition to your investment portfolio, providing exposure to the real estate market while offering more liquidity than actually buying a physical property.

The largest investment many people have is their own home. It is arguable whether that should be considered an investment or not, so if you don’t want to include your own home as an investment, or you don’t own a home and want to get into real estate, you can purchase a REIT (real estate investment trust).

A REIT gives you ownership in a company that owns real estate. Therefore, as real estate appreciates and collects rent, you typically get a dividend payout – like a quarterly rental income.

What are REITs and how do they work?

REITs are companies that own, operate, or finance income-producing real estate in various sectors, such as residential, commercial, industrial, or healthcare. They are structured in a way that allows them to pass most of their income to shareholders in the form of dividends.

The dividend from a REIT is traditionally higher than a dividend share, as they are designed to be paying out more of their revenue than the average dividend share.

REITs are known for their dividend income. They generally distribute the lion’s share of their rental income to shareholders. Make sure you understand the expected dividend yield and whether it aligns with your income objectives.

Types of REITs

There are different types of REITs, including equity REITs (which own and manage income-producing properties), mortgage REITs (which invest in mortgage loans or mortgage-backed securities), and hybrid REITs (which are a combination of equity and mortgage REITs).

Then there are REITs in various sectors. You could own an equity REIT that specialises in commercial property, office property, shopping centres, retail homes, or strip malls.

Keeping an eye on larger macro trends can help you identify which type of REIT you’d like to own. For instance, if industrial warehouse space is in high demand, you might want to check out REITs that lease industrial warehouses. But as places like the shopping centre are continuing to fall out of favour, maybe don’t put all your REIT allocation into a REIT specialising in shopping centres.

Risk factors and liquidity

Like any investment, REITs carry risks. These risks may include market risk (real estate market fluctuations), interest rate risk (particularly for mortgage REITs), and credit risk (for mortgage-backed securities). Be aware of the specific risks associated with the REIT you’re considering.

REITs are typically traded on major share exchanges, which provide liquidity. However, the share price can be subject to market volatility, so consider your investment horizon and risk tolerance.

Examples of REITs

Just as with any investment, diversification is essential. It’s probably best not to put all your money into a single REIT. Consider spreading your investment across multiple REITs or asset classes instead.

Some of the larger REITs in Australia include:

• Charter Hall Group (CHC)
• GPT Group (GPT)
• Dexus (DXS)
• Goodman Group (GMG)
• Scentre Group (SCG)

If you have a particular interest in diversifying into listed property, you may feel you wish to spread your risk and follow an index approach. Enter the diversified Vanguard Australian Property Securities Index ETF (VAP). This fund has weighted exposure to 33 REITs that cover residential, office, retail, and industrial assets.

A really interesting exercise is to look up some of the individual REITs listed to see some of their holdings, as they would be places you’ve been or seen. Then, look at the 33 companies in the VAP ETF and you will see more popular names, such as Stockland (is that your small, local shopping centre?).

Glen James is a finance guru and author of The Quick-Start Guide to Investing