Are REITs (Real Estate Investment Trusts) a good investment? Will they continue to be in the face of a rapidly inflating property market?
Whilst REITs are usually fairly unique (other than being a vehicle for investing in real estate), there are several factors that individuals can take into account when assessing an investment in one.
First of all, what is an REIT?
Simply put, a Real Estate Investment Trust, or REIT, is a company which invests it’s capital in a portfolio of real estate assets. By law, they are required to distribute the bulk of profits to shareholders, and are therefore a favoured investment for investors pursuing income. The generate these profits through rents paid to tenants of the assets owned by the REIT; whether families, businesses, entrepreneurs, governments or other institutions.
Some REITs make quarterly payments, whilst others make monthly disbursements of accumulated profit. They also usually (but not always), focus on a particular type of real estate such as commercial, residential or medical.
What things could I consider when investing in an REIT?
Trying to assess the attractiveness of one of these investments is similar to other investment options. Try not to assume that all real estate is the same (just as companies are different, so are types of property). For example, housing prices might increase due to the completion of a new golf course in the area, but this is unlikely to affect the value of commercial property.
Likewise, when the economy slows down, commercial property loses it’s attractiveness as more business collapse or lose their ability to meet the terms of their lease. Multi-family properties are likely to increase in value at the same time, as families downsize to balance falling incomes.
To determine whether an REIT is a good investment requires understanding of the strengths of the underlying assets being the Trust. Try to develop an understanding of the macro economic factors in the areas where the trust does business.
Unlike other types of company, REITs are more likely to fund growth through debt financing to maximise returns for their shareholders, but this increase in leverage also increase their risk. It’s often difficult to determine how much ’too much’ debt for an REIT really is. Each loan an REIT takes out comes with individualised terms and conditions which are tailored to the circumstances and performance of the Trust. Before investing in an REIT, try to get as much information as you can about the terms of any loans held, and how factors such as interest rate changes may effort performance. Personally, I try to avoid a debt to capital ratio of more than 65%.
As with any company, the management team is also a huge determinant of success. When assessing the competence of an REIT, research who is running the business. How much experience do they have? What qualifies them? What is their track record? What are analysts saying about them? What information is available on their past performance?
Conclusion
The great thing about the REIT market is that there are so many available. If a residential REIT doesn’t feel like to right choice for you, perhaps an industrial one will. In general, it’s my opinion that REITs are good investments for investors seeking income-generating assets. Just make sure you understand the assets held by it, how it is structured, what debts it how and who is running it.