Property investing can still be done without the need of actual ownership. Instead, investors could invest in companies that own serious portfolios of self appreciating property assets located in some of the world's most desirable locations.
In this article we’re going to briefly cover Real Estate Investment Trusts, which are also known as REITs.
What are REITs?
An REIT is a company that owns, operates, or finances income-generating real estate. This makes it possible for individual investors to earn dividends and/or capital gains from real estate investments — without having to buy, manage, or finance any properties themselves.
Similar to an individual investing in stocks registered on the stock exchange, investors have the chance to acquire shares in an REIT, giving the average individual the ability to expose their portfolio to real estate markets.
REITs are commonly split into three types.
- Equity REITs. Equity REITs tend to own a wide portfolio of different properties, these could include warehouses, offices, art galleries, hotels, showrooms, luxury homes and much more. These REITs earn most of their revenue from rental income generated on these properties.
- Mortgage REITs. These refer to organisations that earn an interest on loans provided to companies and individuals to purchase real estate, as you’d imagine, the main revenue stream would be derived from interest on loans.
- Hybrid REITs. These would involve companies that own, rent and manage real estate, whilst also providing loans to other companies and individuals, simultaneously earning an interest on loans provided.
All the above types of REITs are listed on the stock exchange allowing individuals to own shares in such companies. REIT’s can also be publicly non-listed or private, but since we can’t get our hands on a private company, we’re going to focus on the publicly traded REITs. Examples of REITs Include:
- SERGO. SEGRO is a real estate company in the logistics space. They make their money by renting out logistics related properties and developing new properties to rent out. Logistics properties are ones related to the distribution of products, something heavily needed as consumers shift towards online retailing. An example of a customer might be Amazon, that would rent out a huge warehouse as a hub to store their goods and distribute them from there.
- Aroundtown. Operating with a fully integrated real estate value chain, Aroundtown targets value creation opportunities from repositioning properties. Aroundtown picks quality cash generating properties with an upside potential in rent and/or occupancy increases. The main investments that aroundtown caters for includes the acquisition of hotels and also office spaces.
- Vonovia. Is a real estate company located in Germany. The company mainly focuses on residential properties and currently owns around 400,000 apartments in Germany, Sweden, and Austria, making it a significant market player in these countries.
In order for a company to be considered as an REIT, the entity must meet a list of criteria set out by regulators. As an example, in the United States, in order for an organisation to be considered an REIT, the company must:
- derive 75% of its income directly from real estate;
- hold a total asset base that comprises 75% real estate; and
- generate 95% passive income.
These rules and regulations could vary depending on location and jurisdiction. With that being said we’re not going to focus on this area too much.
How can individuals invest in REITs?
- Investors could purchase shares in an individual company that is registered on the stock exchange as well as a mutual fund;
- Investors could invest in exchange-traded funds (ETFs) that are designed to track the movement of a basket of companies listed on the stock exchange, or perhaps an underlying index; lastly
- Investors could also opt to invest in non-publicly traded REITs through brokers or financial advisors.
Pros and Cons to investing in REITs
REITs can play an important part in an investment portfolio because they can offer a strong, stable annual dividend and the potential for long-term capital appreciation.
REIT total return performance for the last 20 years has outperformed the S&P 500 Index, other indices, and the rate of inflation (1–3% annually).
Source — Investopedia.
- Liquidity. Unlike the local property market, REITs are registered on highly liquid stock exchanges, meaning that a person could sell their interests in their investments in seconds, not months or years.
- Appreciation & dividends. REITs tend to have strong cash flow generated from the rental of their real estate. This often translates into dividends passed on the stockholders, as well as capital appreciation.
- Diversification. You don’t need to physically own a property to diversify your portfolio and get exposure to the real estate market, but rather can get exposure to companies that own properties in the most attractive areas of the world. That in itself poses as a great opportunity.
- Management and time: As many of us know, physical property takes a lot of time and energy when it comes to management, in many cases, property owners and investors employ a property manager to ensure continuance of operations. On the other hand, investing in REITs implies no physical management burdens by the investor, whilst also reaping similar, and in most cases, better returns per euro invested.
- Barriers to entry: Investing in property usually requires a high level of capital expenditure. Buying a property today will require hundreds of thousands of euros. This has inevitably resulted in fewer and fewer people being able to expose their portfolio to the local and foreign real estate markets.
When it comes to investing in REITs there are virtually no barriers to entry other than a small transaction fee that you’d pay to your brokerage. In addition to this, technology has definitely democratised the whole process of acquiring equities, giving everyone the opportunity to get exposed to the returns of the real estate market.
- Slow growth. If you’re investing in an REIT expect slow, yet relatively stable growth. REITs have had a steady winning streak over inflation and the S&P500 over the past 20 years, making them good investments. However, one cannot expect to see similar gains to those recognised in say, the tech sector.
- Potential for high management and transaction fees. If you’re investing in an actively managed ETF, mutual fund, or non-publicly traded REIT, then you need to consider the management fees that are going to be incurred when it comes to the sale of your investment. If you have no time or knowledge to look into each individual investment, you may want to leave it in the hands of a professional advisor or portfolio manager.
Currently Malta has no REITs registered on the local exchange, however, it does appear that this could change in the near future. Since the previous budget (when the implementation of REITs was first mentioned), REIT structures have been accepted by the MFSA, and legal implementation soon followed after the announcements.
Now with the appropriate legal frameworks in place, one can assume that Malta will soon have its very first REIT registered on the local exchange.
The Investment hub Malta is a co-founded community-based platform that seeks to engage experienced and inexperienced inventors through the release of informative content.
The group was co-founded by Jean Gatt, Steven Coleiro and Steven Galea Pace who took up the initiative to start an independent investing community in Malta. All three individuals come from different professional backgrounds but all hold one common passion - Investing.
The main motive behind this group is to encourage all generations to approach investment opportunities with a higher level of education and convection to avoid making mistakes in the market. As property investing has become out of reach for many individuals, the group seeks to inform individuals of other alternative investments.
This Growing independent community can be found on Facebook where content is frequently being released.
DISCLAIMER: The content of this article does not necessarily reflect or represent the views and opinions of The Malta Chamber of Commerce, Enterprise and Industry.