Most equity or fixed-income portfolios would usually contain REITs. They are often seen as a good tool to spread your risk and increase the potential returns of your investments.
REITs offer the advantage of generating dividend income, as well as capital appreciation. This makes them a nice addition to a portfolio made of bonds, cash and stock.
REITs are companies that owns and operates income-producing real estate. You can choose to pick individual REITs to invest in. REITs are also available as part of exchange-traded funds which allows you to invest in a basket of REITs.
This article is going to take a closer look at the main types of REITs and their features.
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We have analysed all the REITs in Singapore to, you can read it here: REITs in Singapore
Shopping malls you visit are most probably owned by a retail REIT.
If you consider investing in these REITs, you should assess the health of the retail industry itself, as it is one of the major influence factors of your future profits.
Keep in mind that retail REITs generate profits by renting space to its tenants. If their tenants have cash flow issues, they may not be able to pay their rent on time. Some of them may even default on their payment.
In such situations, the REIT has to find a replacement quickly and this isn’t always possible. If you intend to invest in retail REITs, look out for those with very strong anchor tenants.
Once you’ve finished with your analysis, you have to analyze the REIT itself. Look for signs of strong balance sheets, sustainable profits and little debt.
In a troubled economy, retail REITs with cash on hand will be able to purchase good real estate at very discounted prices. Smart REIT managers are always going to take advantage of such situations.
Residential REITs own and manage manufactured housing and rental apartments or buildings.
When analysing such REITs, consider how affordable homes are in the target area, compared to the country average. Wherever home affordability is low, the number of people who are forced to rent is higher, thus increasing the rentl prices. As a consequence, moat major residential REITs focus on big urban areas.
Investors also look at population and job growth. Cities with blossoming economy attract more people, therefore bringing a higher demand for rental homes.
Rising rents combined with low supply are ideal conditions for residential REITs. As in any other industry, companies with the strongest balance sheets afford to make the best investments.
If you are looking to invest in REITs, learn how you can efficiently analyse them at our REITs Investing Mastery Course.
These are the REITs that focus their investments in office buildings. Their income comes from the rental of office space. The main advantage is that they usually deal with long term leases.
There are a few things to consider before investing in an office REIT:
- The state of the economy
- The unemployment rate and its trend
- The vacancy rates
- The economic well-being of the area in which the REITs makes its investments
- The capital available for acquisitions
Office REITs may also be seen as a subset of industrial REITs.
Industrial REITs manage and own industrial facilities, they rent these spaces to their tenants. These spaces include (but are not limited to) warehouses, distribution centers and specialised facilities.
It’s important to take a look at the spaces and facilities that these REITs own and understand the industry players whom are renting the spaces. Also note that due to the shear volume of space each facility holds, losing a tenant may be a huge blow for industrial REITs with little assets.
These REITs hold properties in the hospitality sector such as hotels, budget accommodations, serviced apartments or short term lodging facilities.
It may sound attractive to be able to own hotels through Hospitality REITs, but there are a few considerations you will have to note as well. Understand how the hospitality sector is doing. When the economy is poor, the hospitality sector would be expected to face lower sales and occupancy rates, especially if the hotel is focused on tourism.
It is good to take a look at the properties owned by the hospitality REIT and understand its average occupancy rate. As these properties are sustained by short term stays and lease, their performance can be volatile and highly responsive to economic movements.
Healthcare REITS focus their investments in various medical facilities such as hospitals, medical centers, nursing homes and retirement facilities. Their success is tightly connected to the evolution of the healthcare system.
When looking to invest in healthcare REITs, you should choose the ones that rely on a diversified group of clients with a wide range of property types.
Also check that the REITs of your choice have significant healthcare experience.
These REITs invest in mortgages and are not as common as compared to the rest of the REITs.
Whenever interest rates increase, their book values tend to decrease. This leads to a decline of stock prices.
You should also take into consideration that mortgage REITs get part of their capital from secured and unsecured debt offerings. Major fluctuations of interest rates leads to expensive financing. This can reduce the value of their portfolio.
It may be safer to focus on REITs that owns the actual assets.
If you are looking to invest in REITs, learn how you can efficiently analyse them at our REITs Investing Fundamental Course.