Real Estate Investment Trusts: What are REITs?
Real estate investment trusts (REITs) can be an interesting investment option for those looking for passive income. Find out how REITs work and whether or not they are a security worth adding to your portfolio.
- REITs are a type of investment vehicle that allows investors to own a share in a portfolio of real estate properties. They are publicly traded and offer investors the opportunity to gain exposure to real estate without directly owning property assets.
- REITs are required by law in the United States to distribute at least 90% of their taxable income to shareholders as dividends. In Australia, while not required, many REITs choose to distribute a significant portion of their earnings as dividends in order to attract investors seeking regular income.
- Real estate investment trusts can offer several advantages to investors, including diversification, liquidity, and potentially high dividend yields. However, investors should also be aware of the risks associated with these equities, including market fluctuations, interest rate changes, and potential exposure to specific geographic or sector risks. It is important to carefully evaluate the potential benefits and risks of a REIT before making any investment decisions.
What is a Real Estate Investment Trust (REIT)?
A Real Estate Investment Trust (REIT) is a type of company that owns and operates income producing real estate assets, such as office buildings, apartment complexes, shopping centers, hotels, and warehouses. REITs provide investors with a way to invest in real estate without having to purchase and manage the properties themselves.
REITs typically generate revenue from the rental income and property mortgages received from their properties and can also earn capital gains by buying and selling property assets. REITs in the U.S. are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends, which makes them a popular choice for income-seeking investors.
REITs are traded on major stock exchanges and offer investors the opportunity to invest in a diversified portfolio of real estate with relatively low minimum investments.
How do REITs work?
REITs (real estate investment trusts) work similarly in both the United States and Australia as a way for investors to own a share in a portfolio of commercial real estate and other kinds of properties.
In the United States, a REIT is a company that owns and operates income producing real estate assets, such as office buildings, apartment buildings and complexes, retail centres, and warehouses. REITs are required to distribute at least 90% of their taxable income as dividends to shareholders in order to maintain their tax-advantaged status.
In Australia, a REIT is known as an A-REIT (Australian Real Estate Investment Trust), and operates in a similar manner. An A-REIT is a listed property trust that owns and operates income producing real estate assets such as commercial, industrial, and retail properties. While not required by law to distribute a minimum percentage of taxed income as dividends, many A-REITs choose to do so in order to attract new investors.
Both U.S. and Australian REITs can be publicly traded and offer investors the opportunity to gain exposure to real estate without the need to directly own property. Investors can buy and sell shares of REITs on the stock market, and potentially benefit from any increase in the value of the underlying real estate properties, as well as any dividend income paid out by the REIT.
REITs can also grow their portfolio by raising capital through issuing new shares or borrowing money to purchase new properties. This capital growth allows REITs to acquire more properties and increase their rental income, which in turn can lead to higher dividends for investors.
In addition, some REITs may specialise in certain types of real estate, such as residential or commercial properties. This allows investors to target investment funds at specific sectors of the real estate market and diversify their investments.
Types of REITs
REITs come in several different types, each with its own unique characteristics and risks. Below are six types of REITs that investors can choose from:
These are the most common type of REITs. Equity REITs own and manage income-generating properties, such as office buildings, retail centers, and apartment complexes. These REITs generate income from rent paid by tenants and appreciation of the value of the underlying properties.
These REITs invest in and manage mortgages on income-generating properties, such as office buildings or shopping centers, rather than owning the properties themselves. Mortgage REITs generate income from the interest paid on the mortgages they hold.
These REITs combine the features of equity and mortgage REITs, owning both income-generating properties and mortgage loans. Hybrid REITs generate income from both rent and interest payments.
Public non-listed REITs
These are REITs that are not publicly traded, but still allow investors to gain exposure to a portfolio of real estate. Public non-listed REITs are sold through broker-dealers and have fewer regulatory requirements than publicly traded REITs.
These are similar to public non-listed REITs, but are not registered with regulators and are generally only available to accredited investors. Private REITs are not subject to the same disclosure and reporting requirements as publicly traded REITs. For this reason, private REITs are generally perceived as riskier than other types and are usually exclusive to institutional investors.
These REITs own and manage specific types of properties, such as healthcare facilities, data centers, or timberland. Specialty REITs can provide diversification benefits and may have unique risk and return characteristics.
It is important to note that each type of REIT has its own unique characteristics and risks, and investors should carefully consider their investment objectives and risk tolerance before investing in any of them. Learn more about the types of REITs from the Australian Securities Exchange and U.S. Securities and Exchange Commission.
💡Related: 10 Australian REITs to Watch on the ASX→
How to invest in a real estate investment trust?
As an Australian investor, you can invest in Real Estate Investment Trusts (REITs) listed on both the Australian Securities Exchange (ASX) and the U.S. stock market through a registered investing platform, like Stake. There are several ways to do this:
- Invest in individual REITs: You can buy shares of individual REITs listed on both the ASX and major U.S. stock exchanges such as the New York Stock Exchange (NYSE) or Nasdaq. This can be done through an online investing platform that offers access to both markets. Some examples include Mirvac Group ($MGR), Stockland ($SGP) and Charter Hall Group ($CHC).
- Invest in REIT Exchange Traded Funds (ETFs): You can also invest in REIT exchange-traded funds listed on both the ASX and the U.S. stock market. This provides exposure to a diversified portfolio of REITs across different markets. Some of the popular REIT ETFs available in Australia include Vanguard Australian Property Securities Index ETF ($VAP), SPDR S&P/ASX 200 Listed Property Fund ($SLF) and VanEck Australian Property ETF ($MVA).
- Invest in Global REIT ETFs: Another option is to invest in global REIT ETFs, which provide exposure to a diversified portfolio of REITs listed across different global markets, including the ASX and the U.S. Some of the popular global REIT ETFs available to Australian investors include Vanguard Global ex-U.S. Real Estate ETF ($VNQI) and iShares Global REIT ETF ($REET).
What are the tax implications of REITs?
The tax implications of investing in REITs can vary depending on the country in which the REIT is listed and the type of investment vehicle used. Here are some general tax considerations for Australian investors who invest in REITs listed on both the ASX and the U.S. stock market:
- Dividend income: Most REITs pay out a significant portion of their earnings as dividends. In Australia, dividend income is generally taxed at the investor's marginal tax rate, but there are some tax credits and offsets available that can reduce the payable tax. In the U.S., dividend income received by Australian investors may be subject to withholding tax of up to 30%, but this can be reduced under the Australia-U.S. Double Taxation Agreement to as low as 15% for some investors.
- Capital gains: If an investor sells their REIT shares for a profit, any capital gains are generally taxed at the investor's marginal tax rate in Australia. In the U.S., capital gains tax rates vary depending on the investor's holding period and tax bracket.
- Franking credits: Some Australian REITs distribute franked dividends, which means that the company has already paid tax on the profits before distributing them to shareholders. Australian investors can claim a tax credit for the tax already paid by the company, which can reduce their overall tax liability. However, U.S. REITs generally do not pay franked dividends.
- Foreign tax credits: If an Australian investor pays withholding tax on their U.S. REIT dividends, they may be able to claim a foreign tax credit in Australia to offset their Australian tax liability.
Advantages and disadvantages of REITs
Real estate investment trusts (REITs) have a number of advantages and disadvantages for investors to consider.
- Diversification: REITs allow investors to gain exposure to a diversified portfolio of real estate, which can help to reduce risk. This diversification can also help to mitigate the impact of any negative economic or industry-specific events.
- Regular income: REITs on Wall St are required by law to distribute at least 90% of their taxable income to shareholders, which means they can provide investors with a reliable source of income. This can be especially attractive for investors who are seeking steady cash flows or retirees who are looking for income producing real estate.
- Liquidity: REITs are traded on stock exchanges, which means investors can buy and sell shares easily. This provides investors with flexibility and the ability to easily adjust their portfolio allocation.
- Professional management: REITs are managed by professional teams who have expertise in managing real estate. This can provide investors with peace of mind, as they are not responsible for the day-to-day management of the properties.
- Tax benefits: REITs can offer tax benefits to investors, as they are not subject to federal income tax at the corporate level. This means that the majority of the income is passed on to shareholders, who are then responsible for paying taxes on the distributions they receive.
- Volatility: REITs are subject to market volatility and can experience significant price fluctuations. This can be especially true during periods of economic uncertainty or downturns.
- Interest rate sensitivity: REITs are sensitive to interest rate changes, as rising rates can increase borrowing costs and reduce profitability. This can negatively impact the performance of the REIT and the value of its shares.
- Sector-specific risks: REITs are subject to specific risks related to the real estate sector, such as changes in demand, zoning regulations, and environmental risks. These risks can impact the value of the underlying properties and the performance of the REIT.
- Management fees: REITs typically charge management fees, which can reduce the amount of income that is passed on to shareholders. These fees can vary significantly between different REITs and can impact the overall return on investment.
- Limited control: As a passive investor in a REIT, shareholders have limited control over the management and decision-making processes of the REIT. This means that investors are not able to influence decisions related to property selection or management, which may not align with their individual investment goals or values.
List of Australian REITs on the ASX
Abacus Property Group
Auckland Real Estate Trust
Australian Unity Office Fund
AIMS Property Securities Fund
Charter Hall Group
Centuria Industrial REIT
Charter Hall Long Wale REIT
Cromwell Property Group
Centuria Office REIT
Charter Hall Education Trust
Charter Hall Retail REIT
Dexus Convenience Retail REIT
Dexus Industrial REIT
Dexus Property Group
Elanor Commercial Property Fund
Garda Diversified Property Fund
GDI Property GDI
Growthpoint Properties Australia
Healthco Healthcare and Wellness REIT
Healthco Daily Needs REIT
Hotel Property Investments
Ingenia Communities Group
Newmark Property REIT
National Storage REIT
Ram Essential Services Property Fund
Rural Fund Group
Shopping Centres Australasia Property Group
360 Capital Group
360 Capital Total Return Fund
US Masters Residential Property Fund
US Student Housing REIT
Real Estate Investment Trust FAQs
Are REITs a good investment?
Whether or not REITs are a good investment depends on a variety of factors, including the property market, an investor's financial goals, risk tolerance, and investment horizon. Here are some points to consider when evaluating whether REITs are a good investment for you:
- Investment goals: REITs can be a good investment for investors who are looking for regular income and diversification in their portfolio. However, if an investor is primarily seeking capital appreciation, other types of investments may be more suitable.
- Risk tolerance: REITs can be sensitive to interest rate changes and economic downturns, which can impact their share prices and income distribution to investors. As such, investors should carefully evaluate their risk tolerance before investing in REITs.
- Investment horizon: REITs can be a good long-term investment for investors who have a long investment horizon and can tolerate short-term fluctuations in share prices.
- Portfolio diversification: REITs can be a good way to diversify a portfolio, especially for investors who are looking to add exposure to the real estate sector.
- Tax implications: As discussed earlier, there can be complex tax implications for investing in REITs, which can impact an investor's returns. Investors should carefully consider the tax implications before investing in REITs.
Overall, REITs can be a good investment for some investors, but it is important to carefully evaluate your investment objectives and risk tolerance before making any investment decisions.
Do REITS have to pay dividends?
In the United States, REITs are required by law to pay out at least 90% of their taxable income as dividends to maintain their REIT status and receive certain tax benefits. This means that most U.S. REITs pay regular dividends to their shareholders.
In Australia, REITs are not required by law to pay out a minimum percentage of their taxable income as dividends, but many do so in order to attract investors who are seeking regular income. However, Australian REITs do have certain other tax laws and benefits that are tied to their distribution policies. Specifically, in order to qualify for certain tax concessions, Australian REITs must distribute at least 90% of their taxable income to their shareholders each year.
What's a managed fund REIT?
A managed fund real estate investment trust, also known as a listed property trust (LPT), is a type of real estate investment trust (REIT) that invests in a portfolio of income-generating properties. The main difference between a managed fund REIT and other types of REITs is that a managed fund REIT is managed by a professional fund manager who is responsible for selecting and managing the properties in the investment portfolio itself.
Investors can purchase shares in real estate funds through a managed fund REIT on the stock exchange, which provides them with exposure to a diversified portfolio of real estate. The fund manager collects rent from the properties and pays out regular distributions to investors, which may include both rental income and capital gains.
Managed fund REITs can provide investors with a number of benefits and investment strategies, including diversification, professional management, and liquidity. However, they can also be subject to risks such as fluctuations in property values, changes in interest rates, and the performance of the overall economy.
Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.