What is an Australian Real Estate Investment Trust (A-REIT)?

A Real Estate Investment Trust, or REIT, is a managed portfolio of diversified commercial real estate assets, which can include everything from shopping centres and hotels to industrial buildings.

Initially – and in some areas, still known as –  listed property trusts, some REITs are listed on the Australian Stock Exchange [ASX] and some aren’t.

But all of them enable individual investors with less capital and lower risk tolerance to join the commercial property sector.

It’s for these very reasons that some experienced commercial property investors actually prefer REITs.

Read on to find out more.

How do REITs work in Australia?

Put simply, Australian Real Estate Investment Trusts [A-REITs] pull the resources of investors together to buy a range of property assets, which the trust then manages for a profit. They generate most of their income through rent, with the lion’s share then returned to investors via dividends.

A-REITs are managed by a fund management team, which selects and manages the investment properties on behalf of investors. In addition to rent, A-REITs generate income through capital growth of assets, property development and property-related fund management earnings.

How many REITs are there in Australia?

REITs first appeared on the Australian Stock Exchange in the early 1970s. Picture: Getty

There are currently 47 A-REITs, or Australian REITs, listed on the ASX, with the concept first appearing on the market in the early 1970s.

Property management companies offering REITs now range from Cromwell Property Group, which was first listed  in 1973 to Vitalharvest Freehold Trust’s REIT emergence in 2018.

What are the benefits of REITs?

Industry experts concur that the benefits of REITs far outweigh their risks.

1. Higher dividends and capital growth

“REIT investors can benefit from the capital growth in underlying assets as well as the rental incomes,” REA Group economist, Anne Flaherty explained.

“Generally speaking, commercial property produces higher yields than other asset types and by buying REITs, investors have the possibility of benefiting from these higher yields.”

2. Lower financial entry and risk

“One of the main deterrents to commercial property investing is the high barrier to entry and the fact that they’re higher-risk assets,” Ms Flaherty said.

“But by purchasing REIT shares, you not only can you invest in commercial property with a smaller amount of capital outlay, but you’re also going to reduce your risk.

“This is because REITs are portfolios of assets, generally across multiple sectors.”

3. Greater liquidity

Enjoy high liquidity when investing in REITs. Picture: Getty

“As with any stock, you can sell REITs straight away,” Metropole CEO, Michael Yardney explained.

“I  can’t refinance my home, my investment property or my commercial property as it may take 30, 60 or 90 days.

“But with REITs, I can just ring my stockbroker and sell it because it’s a share.”

5. Perfect passive investment

“REITs are a good investment for passive investors who don’t want to be hands-on or who don’t know what they’re doing,” Mr Yardney said.

“You’ll also have a professional manager manage your assets although this comes at a cost.”

What are the risks of REITs?

COVID has brought some changes to the commercial property sector as well as the stock market overall, which both affect REITs.

1. COVID commercial changes

“Over the last 18 months, many commercial properties have been hard hit by COVID, particularly retail properties, and retail and office assets tend to make up a high proportion of a lot of REIT portfolios,” Ms Flaherty said.

“So REITs with a really high exposure to retail assets have suffered and the other one is office assets.”

Mr Flaherty explained that keen REIT investors should look at portfolios investing in assets with defensive incomes.

“Look for firms that aren’t going anywhere fast, such as medical, childcare or industrial properties, making sure that they have a healthy exposure to assets that aren’t likely to lose value or become vacant,” she said.

2. Stock market reliance

“REITs are a stock, a share, so the value of your REIT is affected by what’s happening in the general stock market, to a degree,” Mr Yardney said.

However, REIT’s liquidity could make this risk almost negligible, he added.

How are REITs taxed?

Make sure you’re not paying REIT “double tax”. Picture: Getty

Firstly, it’s important to find out whether a REIT is a trust or a company, Mr Yardney said.

“Most unlisted REITs are trusts that never keep their income while listed REITs are usually companies so they can choose to retain income to improve their assets,  for example,” Mr Yardney explained.

“Trusts have to distribute their income or otherwise, they’re taxed and at a higher rate.

“But a company will actually give franked dividends, where they’ve already paid the tax, and therefore you will get tax benefits just like you would if you buy shares from Coles or Woolworths.”

Mr Yardney said that in this sense, REIT investors won’t have to pay “double tax”.

“But it’s important to understand if the REIT has paid tax and whether it’s a franked dividend or just pure income, which tends to be the case from unlisted trusts,” he said.

According to ASX, A-REITs can also sometimes feature tax-deferred contributions when a REIT investor’s income is higher than their taxable income.

What should I look for in a REIT?

Do your due diligence when deciding which REIT to invest in. Picture: Getty

“Look at what a REIT’s underlying assets are as well as what sort of returns they can deliver in two ways: yield dividends, or the money you get back from rent, and also capital growth,” Mr Yardney explained.

“Also, look at the management.

“Do they have a good reputation and how long have they been in the business?”

Mr Yardney added it was crucial to check a REIT’s liquidity, or how often the shares were traded, as well as its price volatility and gearing.

“Has the REIT got a lot of gearing and what is their loan-to-value ratios so that if interest rates go up, are they going to be able to cope with it?” he said.

Meanwhile, Ms Flaherty advised potential REIT investors to investigate future strategies and developments.

“You want to make sure that you’re investing in a REIT that is future-proofing themselves,” she said.

“The commercial property market has had such a big shakeup because of COVID so it’s important that REITs are adapting to things.”

How do you buy REITs?

Do your research on REITs and then take the plunge into your desired trust by contacting the trust itself or, if you already have one, your stockbroker or property investment manager.

“I would actually argue that buying a REIT is better than buying an actually commercial property because you’re buying into a portfolio,” Ms Flaherty said.