The great Australian dream is to create wealth from property, but for most Australians buying an investment property or building a property portfolio is simply unattainable. The Australian property market is expensive and competitive, however, there are options, such as REITs which allow investors the opportunity to invest in real estate without the need for a large upfront sum. SG Hiscock is home to a team of Melbourne-based boutique fund managers, with expertise in property securities, both global and Australian. Here we will take a deeper look at REITs, including what they are along with the risks and benefits of investing in them.

What is a REIT?

A real estate investment trust (REIT) is a property fund that provides investors exposure to the property market through their stock portfolio. In Australia they are referred to as A-REITs. Similar to managed investment funds, REITs are actively managed and pool together funds to invest in properties. REITs typically invest in commercial properties such as offices and apartment buildings, shopping centres and hotels.

There Are Two Main Types of REITs

Equity REITs – more common type, equity REITs invest in and own properties. Divided into eight sub-industries, equity REITs are advantageous because they provide broad diversification benefits as well as tax savings. Generating their income through leasing out their properties and collecting rent, they can specialise in owning certain building types, such as hotels or shopping centres or they can be diversified.

Mortgage REITs – this type is involved in the investment and ownership of property mortgages. These REITs loan money to the owners of real estate for mortgages or mortgage-backed securities and they generate income through the interest paid on the loan.

What are the Benefits?

There are a number of reasons some investors are drawn to REITs.

  • Investors are able to earn a share of the income generated by tenants and capital growth, without having to purchase the physical property.
  • Generally, REITs also pay out close to all of their taxable income as dividends to their shareholders, providing a stable income stream for investors.
  • They are traded on the stock market so you can buy or sell them during trading hours. This makes them a highly liquid asset, when compared to traditional real estate investing.
  • The minimum initial investment required for a REIT in Australia is $500.
  • As they tend to invest in multiple property assets and provide exposure to different parts of the property market, investing in REITs can provide more diversification.
  • As distributions often come with a ‘tax-deferred’ component, investors will only pay tax on some of the income.
  • Almost all REITs structure their leases to include mandatory rent increases each year. This offers certainty around future earnings and income for the REIT and the investor.

Are There Any Risks of Investing in REITs?

Similar to most other managed investment funds, there are associated risks so it is vital to do your due diligence and examine the management team behind the investment.

  • Development risk – if your REIT is planning to build a new building then you should consider their ability to lease out the property.
  • Income risk – A REIT’s distributions may be reduced due to the underperformance of the underlying property.
  • Concentration risk – If a substantial value of the REIT’s assets is based in one building, suburb, city or state, you could be exposed to greater risk.
  • Capital losses – The value of the units may go down in line with the share market, a downturn in the property market or for reasons specific to that trust.

Want to Know More About Investing in Property Securities and REITs?

REITs can provide exposure to the property market which can otherwise be difficult to obtain for many investors. They also offer an income stream that can be attractive in a low yield environment.

To learn more about how to invest in REITs and see which ones are available on the Australian market, get in touch with the fund managers at SG Hiscock today. Enquire online now or call (03) 9612 4600 to speak with our friendly team.