REITs (real estate investment trusts) can offer investors a way to get into the property market and diversify their portfolios. Learn more about five of the most popular types of REIT here.
Have you ever wanted to get involved in the property market, but never had the opportunity? Whether it is saving for a down payment or finding that perfect place, it can be hard to take your first step on the real estate ladder. REITs can give investors the opportunity to invest in property without having to bear the cost of the whole property by themselves.
Read further to learn more about five different types of REIT investments:
- Industrial REITs
- Office REITs
- Residential REITs
- Healthcare REITs
- Retail REITs
What are REITs?
REIT stands for real estate investment trust. These trusts represent pooled investor capital invested in properties that generally produce revenue.
In Australia, REITs are known as A-REITs. However, there are plenty of international REIT investment opportunities, with many opportunities for trusts operating in the United States.
A-REITs have a recent history of strong performance, with total returns for the sector in the 12 months ending August 2021 of 31.8%. But, as you will see below, there are many factors that can influence different aspects of the property market. And it is important to understand that past performance does not guarantee future success.
What are Industrial REITs?
Industrial REIT real estate focuses on properties involved in the manufacture, distribution and storage of goods and services.
During the 2020 COVID-19 pandemic, some industrial REITs were a little more resistant to economic downturn than others due to the huge e-commerce boom. That might have been because industrial real estate played a big role in the supply chain that helped service this boom.
This same thinking can be applied to the stronger performance of the industrial sector in 2021, as industrial property, and, therefore, industrial REITs, generally performed well with sustained e-commerce activity.
According to the Australian Financial Review, with a more digital economy, comes more demand for warehousing inventory, which may present more opportunities for returns for investors, indicating one of the potential pros of industrial REITs.
Industrial real estate’s importance to goods and service production across various industries gives investors a chance to potentially ride out difficult economic circumstances.
For example, while some goods production might decline, storage might need to pick up with supply chains disrupted. Another potential benefit is that industrial tenants often sign long-term contracts, which can offer some income dependability.
Potential drawbacks to industrial REITs mirror some of the potential dangers to REIT investment overall. If interest rates rise, industrial REITs can take a hit. Too much growth too fast can be a risk, too, in the form of oversupply.
Some popular examples of industrial REITs include:
Tip: For other ways to invest in this sector, you can research and track industrial goods stocks on eToro.
What are Office REITs?
Office REITs own and develop office properties, leasing work spaces to tenants looking to accommodate their employees.
The largest REITs may encompass some of the skyscrapers you see in a large city’s central business district (CBD), but the types of buildings owned and managed can vary, as too can their location. Some office REITs may also focus on leasing their properties to specific tenants, ranging from fintech and life sciences companies to government agencies, or strive to develop larger office campuses.
Many investors are interested in how office REITs will perform in the “new normal” post-COVID. After underperforming compared to the broader REIT index in the 2010s, it remains to be seen what long-term impact the continuing work-from-home shift will have on these investments.
Office REIT properties also often draw long-term tenants, which can mean more dependable income. Lengthy weighted-average lease expiries (WALE) have helped to protect office REIT values. There is some cautious optimism for A-REITS, with achieved Covid vaccination rate targets giving thousands the confidence to return to the office and many major tenants holding onto their leases for the time being.
Another benefit of office REIT properties is that they are often located in desirable real estate locations — major commerce hubs with sustained interest and demand.
Potential drawbacks to office REITs include the properties’ relationship with major economic factors . A poor economy or rising unemployment can sometimes cause the value of office REITs to decline.
Two of the largest office REITs are:
What are Residential REITs?
Residential REIT portfolios generally consist of large apartment complexes, often found in the middle of busy cities, student housing around universities, and other forms of multi-family housing.
Many people consider residential REITs generally stable because most tenants prefer to stay in one place, even when the local economy is not doing well. They will cut out other costs before moving. Residential REITs also tend to prosper when they consist of properties in places where there is population growth.
One downside is that residential REITs can be impacted negatively when home ownership increases. This can sometimes be influenced by federal mandates that help citizens to buy homes. However, in larger markets such as the US in 2021, we have not seen this happening — in fact, the opposite has been true.
According to NASDAQ, many potential buyers in the US have been priced out of home ownership. This is causing them to turn to apartment rental even though median rent is rising, which, in turn, is increasing interest in residential real estate investment.
As opposed to other types of REIT properties, residential leases can be relatively short, which means greater turnover and potentially more uncertainty — another possible drawback for residential REITs.
Two of the top residential REITs are:
What are Healthcare REITs?
Healthcare REITs are trusts that invest in property related to the healthcare industry. These holdings include everything from hospitals to aged care homes, rehabilitation centres and other medical facilities.
Aged care facilities were hit hard by the coronavirus pandemic, causing some healthcare REITs to decrease in value.
But Covid vaccine rollouts helped the healthcare sector to rebound over the first half of 2021. And while there will be resistance as long as COVID-19 exists, the aging of the Baby Boomer generation — considered larger and wealthier than its peers — could lead to a positive future for the sector.
One of the reasons some investors like healthcare REITs is that these services generally do not ebb and flow like other aspects of everyday life. There will always be a need for them.
Because of this, many healthcare REITs offer reliable dividends. This is similar to one of the main attractions of blue-chip stocks, another type of asset that is considered relatively stable.
A potential negative of healthcare REITs is the oversupply of facilities (generally outside the hospital space). Meanwhile, the increased specialisation of outpatient facilities can mean a decline in hospital usage for some procedures.
Two of the top healthcare REITS are:
Tip: If you want another way to invest in the industry, research and track other healthcare stocks on eToro.
What are Retail REITs?
Retail REITs make up a large portion of the overall REIT landscape. These properties are, in large part, shopping centres and retail stores. This industry took a huge hit in 2020, when COVID-19 isolation guidelines prohibited hundreds of millions of shoppers from going to stores.
The future of this REIT type will be of great interest to analysts as we wait and see the long-term effects of the e-commerce boom.
One benefit of retail REITs is that many tenancy agreements in this sector favour the property owner, in this case, the REIT.
But a downside of retail REITs was on display in 2020 and most of 2021, as the fall in foot traffic and in-store shopping caused many retailers around the world to default on their rental agreements.
Achieved vaccination targets in Australia and the reopening of major cities around the country could mean better performance for A-REITs ahead in 2023.
So, too, could businesses signing new storefront leases or paying late rent that help the sector recover. But even before lockdowns, the rise in popularity of large e-commerce retailers was already impacting retail REITs.
Two of the most popular and largest retail REITs are:
REITs can potentially be a great way for you to add some real estate holdings to your portfolio and diversify your investment geographically. Just remember that, as with any type of investment, they do come with their own set of potential benefits and risks.
FAQs
- What is weighted average lease expiry (WALE)?
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Weighted average lease expiry (WALE) is a metric used to measure a property portfolio’s risk of going vacant. Properties that have long WALEs are at the smallest risk of vacancy. Most REIT investors believe that the longer the WALE, the better.
But because properties with long WALEs often have large corporations or government department tenants, there is less room to negotiate rent increases than with smaller tenants.
If you are seeking stability of income and predictability, a longer WALE may be a safer option. If you are looking for the potential for stronger income growth, a shorter WALE may suit you.
- Should I invest in REITs?
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Much like any other type of asset, REITs may or may not be suited to your investment strategy. It is important to assess your personal investment strategy and risk tolerance before investing in REITs.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.