Securing space

Real estate investing is not just about homes, companies need a place to carry out services and store their goods.

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Investors can invest in the real estate sector through the stock market. Real estate management and development companies, as well as equity real estate investment trusts REITs are found on stock exchange and can be traded like shares. This makes them easy to buy and sell when compared to physical property. REITs also often hold a portfolio of real estate assets, which provides more diversification than a single property. They can focus on a specific market such as retail or a variety of areas. 

These are investment structures set up to own or finance properties, with professionals managing all the tasks related to the asset. REITs earn money through renting and leasing their properties, then distribute the income to shareholders as dividends. Investors interested in regular dividends, rather than capital growth can be well served by REITs, as the U.S. has laws that require them to payout around 90% of income and only use the remaining 10% to buy new holdings. 

Prologis ($PLD)

Prologis is a REIT specialising in logistics and industrial real estate properties. The business has assets across Asia, Europe, North and South America, with wholly and partially owned projects equalling around 114 million square metres of space. Although their business is mainly in the U.S. market, as around 86% of its US$5.6b annual net income from operations was earned in the country at the end of Q3 2023. In terms of cash generated for investors, many look to the funds from operations (FFO) figure for REITs. Prologis’ FFO per diluted share fell from US$1.73 in Q3 2022 to US$1.30 for the same period in 2023. 

This REIT is for investors who are particularly interested in the business-to-business and retail or online fulfilment segment. As moving goods efficiently is important for these clients, the company targets strategic locations for its facilities. However, investors should keep in mind that these in demand areas can be pricey and the firm itself is exposed to trends in the e-commerce industry, with negative consumer sentiments seeing the level of its space utilisation falling in the U.S. Amongst its top ten customers by amount of space rented, Prologis counts major firms such as FedEx ($FDX), Home Depot ($HD), Amazon ($AMZN) and DHL. 

Equinix ($EQX)

Equinix provides data centre infrastructure and operates 251 facilities across 32 countries. With the ever increasing levels of digitalisation and rising need for more processing power, the firm has gained 240 new global customers in Q3 2023. Their revenues are quite geographically diversified, with 44% coming from North and South America, 33% from Europe, the Middle East and Africa, as well as the remaining 21% from the Asia-Pacific region. Investors might be interested in the stock due to its proportion of recurring revenues, which were US$1.96b in Q3 2023, while the non-recurring amount was only US$99.89m.

Major customers include cloud service providers such as AWS ($AMZN), Azure ($MSFT), Google Cloud ($GOOGL) and Oracle ($ORCL). However, investors should consider that these businesses are also building some of their own data centres. Equinix is focusing on increasing its ownership of strategic properties, as at the end of Q3 2023 only 64% of recurring revenues came from owned properties while the rest of the arrangements are in leases of various lengths. Investors who are interested in this megatrend could also be well served by the Global X Data Centres REITs & Digital Infrastructure ETF ($VPN) rather than a single stock. 

Public Storage ($PSA)

Public Storage serves nearly 2 million customers as the owner, operator and developer of around 3,300 self-storage facilities across the U.S. They’ve benefited from the trends of rising urbanisation and downsizing, as people seek for space for their belongings outside of their homes. Investors could see this stock as a more defensive option, as rising house prices and rents has seen many people move into smaller places. Public Storage has been growing its presence through acquisitions, which account for 18% of their portfolio as at the end of Q3 2023, while new developments were 4%, redevelopments 7% and stable properties the remaining 71%. 

The company has optimised its payroll system, saved on utility bills through implementing solar power and LED light solutions. These actions have resulted in Public Storage having a net operating income margin of 79.7%, ahead of its competitor ExtraSpace Storage at 75.3%. While self-storage facilities tend to have relatively low costs and maintenance when compared to other property types, these expansions usually still involve taking on debt. To help raise these funds many REITs acquire credit ratings as a signal about the riskiness of their debt, with AAA being the highest ranking. Public Storage’s senior notes payable have an “A” credit rating by S&P and “A2” by Moody’s, while their preferred shares are “A3” by Moody’s and “BBB+” by S&P.  

Prime locations 

There are several ETF options for investors who want to invest in the real estate sector generally, rather than looking for a specific stock. The Schwab U.S. REIT ETF ($SCHH) is a relatively low cost option for investors looking to gain exposure to U.S. firms in the sector for a fee of 0.07%. It excludes mortgage and hybrid REITs, focusing more on commercial properties. The REIT Vanguard ETF ($VNQ) is a similar offering, which had a higher number of holdings at 30 November 2023, with 163 compared to SCHH’s 124 at 29 December 2023, but also had a higher fee of 0.12%.

The VanEck Mortgage REIT Income ETF ($MORT) is a better choice for investors interested in the U.S. mortgage market. A home is the biggest purchase most individuals make during their lifetime, but this kind of ETF gives access to a portfolio of different kinds of residential properties in various locations from low starting cost, rather than a single asset. Investors wanting to access stocks outside of the U.S. should look to the iShares Global REIT ($REET). While 71.31% of its holdings are still listed in the U.S. as at 22 December 2023, it includes companies such as Prologis and Equinix which have assets and revenue streams coming from multiple countries. 

Investors wanting to focus on a particular segment of commercial properties can also find more specialised ETFs. For those interested in the healthcare sector, the CareTrust REIT ($CTRE) and Global Medical REIT ($GMRE) are two options in terms of ETFs. The Apple Hospitality REIT ($APLE) has a portfolio of high end hotels for investors wanting to capitalise on consumers more insulated from cost of living concerns. Those who are bearish about the future of working from home patterns in the U.S. might look to the Orion Office REIT ($ONL) or City Office REIT ($CIO). 


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