What Are Real Estate Investment Trusts (REITs)?

Real estate investment trusts (REITs) are companies that invest in income-producing real estate. What makes them appealing to many Australians is that they allow them to invest in property without buying a building outright.

A good way to think of REITs is to imagine them as real estate mutual funds. Through real estate investment trusts, multiple investors pool their money to access a diversified property portfolio.

The great thing about REITs is that they can make investing in commercial property (like shopping centres or office buildings), as well as residential property, much easier, offering units that are publicly traded on the ASX.

Let’s find out more about Australian REITs and how they might be a viable investment option for you.

How do REITs work?

REITs operate on the simple premise of investors pooling money to invest in large-scale, income-producing real estate.

This structure helps Australians access both residential and commercial property markets without the high upfront costs or complexity involved in direct ownership.

Property focus

Real estate investment trusts provide loans for or invest in a wide range of real estate assets throughout Australia. These might include office towers, retail centres, industrial properties, healthcare facilities, or even large-scale residential complexes. The main goal of each trust is to generate consistent income through property investments.

Income generation

Essentially, there are two ways to generate income through REITs. Most do so by leasing space and collecting rent from tenants. These are called equity REITs and they typically pay out a large portion of their earnings as distributions.

Equity REITs are the most common type of REITs. These trusts own and manage income-producing real estate across a wide range of sectors.

Typically, they include residential developments, shopping centres, office buildings, and industrial properties. However, they can also cover healthcare facilities, hotels, data centres and even infrastructure like cell towers.

Income is generated by the trusts primarily through rent paid by their tenants.

Mortgage REITs (mREITs) are another income generator. These trusts earn income through interest. Therefore, they offer an alternative way to generate income from the real estate sector.

Mortgage REITs own property directly. Instead, they provide loans or invest in mortgage-backed securities. Through mortgage REITs, the fund can choose to lend to property owners and earn income from their interest payments.

Alternatively, they can adopt a mix of both strategies through what is known as hybrid REITs. Hybrid REITs combine both approaches. In other words, they own property and finance it to diversify their income sources.

Shareholder role

Investors can buy units in a REIT, in much the same way as they might purchase shares in a listed company. Doing so entitles them to a portion of the income generated by the trust’s property portfolio.

What makes real estate investment trusts an attractive option to shareholders is that they are often publicly traded and listed on the ASX. Therefore, they provide liquidity, transparency, and the ability to diversify their real estate exposure.

Real estate investment trusts in Australia

In Australia, listed REITs are referred to as A-REITs (Australian real estate investment trusts). They offer local investors exposure to diversified property assets across commercial, residential, retail, and industrial sectors.

For individual investors, publicly traded REITs are the most accessible option. These are listed on major stock exchanges and are managed by experienced fund managers. (You can learn more about A-REITs on the ASX website.)

A-REITs allow investors to buy and sell units like shares. They offer a convenient way to invest in diversified real estate assets through a real estate fund structure.

How to invest in REITs

Australians can invest in real estate investment trusts in several different ways on both a local and a global level.

Investing in A-REITs

Australian real estate investment trusts are easy to buy and sell through any Australian stockbroker or online trading platform.

Just like purchasing shares, investors can select individual A-REITs that will help them meet their interests. For instance, they can buy into assets like retail centres, office buildings, or industrial properties through these funds.

Perhaps the main pull of A-REITs is that they provide a simple way to access the Australian property market without directly owning bricks and mortar.

Investing in global REITs

Australians can also diversify their portfolios by investing in international real estate markets. The most common method is through Global REIT Exchange Traded Funds (ETFs). Many of these are listed on the ASX.

These funds typically include the terms ‘global property’ or ‘international REIT’ in their names. They often offer exposure to real estate assets across the US, Europe, Asia, and other parts of the world.

It’s also possible to invest directly in public REITs that are listed on overseas exchanges. However, this can be quite complex as it involves currency considerations and is better suited to experienced investors.

Why invest in REITs?

REITs offer a practical way for Australians to invest in income-producing real estate without the responsibilities of direct property ownership.

Whether through local A-REITs or global property funds, they can provide investors with several benefits. These may include:

Easy access to high-value real estate

REITs make it possible to invest in both residential property, as well as large-scale commercial property, such as office towers and shopping centres. Investors can do this without needing to put down a large deposit or take out a loan.

Regular income stream

Many REITs pay consistent distributions that are similar to dividends. These are funded by rental payments from tenants and can provide you with a regular source of income.

Diversification

REITs can help spread risk across different property assets. At the same time, they can reduce an investor’s reliance on traditional investments like shares or bonds.

Liquidity

Unlike physical property, publicly traded REITs listed on the ASX can be bought and sold quickly. For investors, this gives them a lot more freedom to manage their investments.

Professional management

A REIT’s portfolio is managed by a fund manager or investment manager. They oversee tenant leases, maintenance, and capital works. This means investors can enjoy potential profits without the stress of having to personally try to generate them.

Potential for capital growth

If the value of the trust’s real estate assets increases, this can often increase the value of your investment congruently.

Considerations before investing

REITs can offer appealing benefits to Aussie investors. However, it’s important to understand the potential risks and limitations one might face before adding them to your investment strategy.

Here are a few key factors to consider:

Interest rate sensitivity

REITs often rely on debt to fund property purchases. Factors such as rising interest rates can increase the cost of investing in them. This can impact the profitability of the returns.

Market and economic conditions

The real estate market can be quite volatile. For instance, a downturn can lead to higher vacancy rates. It may also require that rents need to be reduced. Both of these scenarios can result in investors receiving lower distributions.

Tax on distributions

REIT income is usually taxed as ordinary income. Depending on your personal tax situation, this may be at a higher rate than capital gains.

It is worth speaking with a registered tax agent for professional advice. They will also advise on what you can claim on your investment property.

Payout limits and growth

REITs must distribute most of their profits. Therefore, they may have limited funds available to reinvest for future capital growth.

Sector concentration

Some REITs may only focus on one area, such as healthcare facilities or retail property. As a result, this could increase an investor’s exposure to specific market risks.

Liquidity in unlisted REITs

Public REITs offer liquidity. However, private REITs or unlisted property trusts may be more difficult to exit.

For a more detailed overview of the risks involved, visit the ASX’s guide to A-REIT benefits and risks.

REITs vs direct real estate investments

REITs and direct real estate investments both offer exposure to the property market. However, they work very differently.

Buying an investment property gives you hands-on control. You can renovate, choose tenants, and influence value. However, it also takes time, money, and ongoing effort.

On the other hand, REITs offer a more passive approach. They enable individuals to invest in a diversified property portfolio (like office towers or industrial properties) without the need to manage tenants or conduct maintenance work.

Additionally, REITs are listed on the ASX, which makes them easier to buy and sell. Essentially, you trade some control for liquidity, professional management, and broader access to real estate assets.

Is a REIT right for you?

REITs can be a helpful way to gain exposure to the real estate market without the need to directly manage property. They offer benefits like regular income, diversification, and access to commercial property assets that might otherwise be out of reach. Moreover, because REITs are typically publicly traded, they also provide greater liquidity than traditional property investments.

However, like all investments, REITs come with risks. For a start, their performance can be affected by interest rate changes, property market conditions, and the specific sectors they invest in. Additionally, income is usually taxed as ordinary income.

So, is a REIT right for you?

It depends on what your personal financial goals are. For instance, are you looking to generate income, diversify your investment portfolio, or seek long-term capital appreciation? Also, how comfortable are you with market fluctuations and property-related risks?

Before making any investment decisions, it is advisable to seek personalised advice. A licensed financial adviser can help you weigh up your options. They will also give you professional advice on whether REIT investments are a suitable option given your overall financial strategy and risk profile.

Wrapping up

Real estate investment trusts (REITs) offer a way to invest in income-producing real estate without owning property directly.

This can be done through A-REITs listed on the ASX or global REIT ETFs. Both provide access to diversified property assets, regular income, and professional management. However, like any investment, they do come with risks and should align with your financial goals.

At DiJones, we’re here to help you understand your property investment options and what might suit your long-term plans. If you’re exploring the world of real estate investing, reach out to our team for expert guidance and local property market insights.

FAQs

What is the minimum investment for a REIT?

There’s no fixed minimum. Since REITs are listed on the ASX, you can start investing with the cost of a single share. Typically, this is around $500 for your first trade through most brokers.

Are REIT dividends guaranteed?

No. While REITs aim to provide regular income, dividends can vary. Some of the factors influencing it include rental income, market conditions, and operating costs.

Can I invest in REITs through my super?

Yes. Many super funds include A-REITs or offer Australians the option to invest in REIT-focused portfolios.

Are REITs taxed like shares?

Generally, yes. Income from REITs is usually taxed as ordinary income. It's best to check with a registered tax adviser for the most up-to-date, professional advice.

Do REITs only invest in commercial property?

Mostly, but not exclusively. Many REITs focus on commercial property. However, others may include residential property and developments, industrial properties, or healthcare facilities.