Investing in Real Estate Investment Trusts (REITs)

When looking to invest in the real estate sector, purchasing a property directly is just one option. A popular alternative is to invest in Real Estate Investment Trusts (REITs).

Investing in REITs provides a way to gain exposure to many areas of the real estate market without the need to directly own property. In this article we explore the various methods of investing in REITs, highlighting key steps and considerations for investors.

Types of REITs

REITs come in various types, each focusing on different sectors of the real estate market. By investing in different types of REITs, investors can achieve significant diversification within their portfolios, whilst reducing risk and enhancing returns.

The Australian REIT (A-REIT) market

The Australian REIT market, known as A-REIT, offers investors access to a diversified portfolio of properties, including:

Retail properties
Office buildings
Industrial properties
Residential properties
Specialty properties such as healthcare facilities, hotels, self-storage units, and more recently, data centres.

BDO in Australia's annual A-REIT Survey has been running for almost thirty years and is one of the longest running analyses of the Australian REIT market. Read our latest analysis which covers topics such as the top ten A-REITs of each year, sector price returns and performance overviews.

Global REIT market

Globally, the REIT market is vast and diverse, offering a broad array of opportunities. Major REIT markets include the United States, Europe, and Asia.

Advantages of investing in REITs

Diversification: REITs provide exposure to various property sectors, helping investors to manage their own risk
Income Generation: REITs must distribute a significant portion of their income as dividends, providing a steady income stream to investors
Liquidity: Publicly traded REITs can be easily bought and sold on stock exchanges
Professional management: REITs are managed by experienced professionals who handle property acquisition, management, and leasing, so investors can buy and sell shares with confidence
Inflation hedge: Real estate tends to appreciate over time, providing a potential hedge against inflation.

Disadvantages of investing in REITs

Market risk: REIT shares can be volatile and are influenced by market conditions
Interest rate sensitivity: REIT prices can be negatively impacted by rising interest rates, which increase borrowing costs and can affect property values
Dividend taxation: Dividends from REITs are typically taxed in the hands of investors. In comparison, direct property investors may be able to write off depreciation or leverage other breaks to enhance their returns
Management fees: REITs, especially those in mutual funds or Exchange Traded Funds (ETFs), can come with management fees that reduce overall returns
Limited growth potential: REITs are required to distribute most of their income as dividends, leaving less capital for growth and reinvestment.

Three ways to invest in REITs

Publicly traded REITs: Shares of publicly traded REITs are listed on stock exchanges, such as the Australian Securities Exchange (ASX). These can be bought and sold like any other stock, providing liquidity, transparency, and ease of access
REIT managed funds and ETFs: These funds pool money from multiple investors to invest in a diversified portfolio of REITs. They offer diversification, professional management, and liquidity
Private REITs: Typically available to accredited or institutional investors, private REITs are not listed on public exchanges. They can offer higher returns due to their focus on niche markets and less liquid assets. However, they are less liquid than public REITs, often requiring long-term capital commitment, and have reduced regulatory oversight, which can increase risk.

How BDO can help

To choose the option that's best for you, it's important to consider your risk profile and how hands-on you want to be with your investment. Exploring your possibilities with BDO’s private wealth experts can help you start on the right foot.

Disclaimer

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO Private Wealth Advisers Pty Ltd ABN 62 805 149 677 AFS Licence No. 238280 is a member of a national association of separate member firms which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Private Wealth Advisers Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of separate member firms. Liability limited by a scheme approved under Professional Standards Legislation.

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