What is a Real Estate Investment Trust (REITs)?

Real estate investment trusts, usually referred to as REITs, invest in real estate on behalf of their investors. The aim is to buy properties which provide a rental income and can be sold on at a profit.

In the United States alone, REITs listed on stock exchanges own approximately US$2 trillion in assets, representing more than 500,000 properties. (NAREIT, August 2020)

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Risk. Investments in real estate securities (including securities listed by Real Estate Investment Trusts (REITs) can be affected by the general performance of stock markets and the property sector. In particular changing interest rates can affect the value of properties in which a property company invests. Investing in real estate securities is not equivalent to investing directly in real estate.

What are the common characteristics of REITs?

The majority of REITs share the following characteristics:

  • REITs own and manage properties as their primary business – the majority of their assets and income must be connected to real estate investment
  • Most REITs trade on major stock exchanges, like any other publicly-owned company
  • They pool their investors’ capital in order to invest – much like a stock or bond mutual fund
  • They make money for their shareholders by collecting rent on the properties they own
  • REITs also improve the properties in their portfolios in order to sell them on at a profit

What sectors of real estate can REITs invest in?

There are three main segments of the real estate market. Some REITs will focus on one of these sectors (or a sub-sector within one of these sectors), while others will invest across all three:

Sectors
01

Residential

Buying and selling properties that are used for homes, as opposed to commercial reasons

02

Commercial

Real estate used for business purposes, such as shops, offices and hotels

03

Industrial

Properties used for manufacturing and production, such as factories and warehouses

Why should investors consider REITs?

REITs provide access to the property market for investors both big and small. This is important, because direct property investments are expensive and often highly illiquid, meaning they can be hard to sell. However, a REIT can be bought and sold on a stock exchange, providing the liquidity investors may desire.

Risk. The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.

Investing in REITs can potentially offer the following:

  • The potential for a sustainable income and competitive capital returns
  • Protection against inflation. If inflation rises, interest rates tend to rise too, which hurts the returns made from bonds. This is not the case with the income and capital gains made from property.
  • Because real estate returns don’t mirror either stock or bond returns, they can offer much-needed This helps to lower overall risk and increase potential returns across your wider investment portfolio

Risk. Diversification and asset allocation may not fully protect you from market risk.

  • You can also gain access to a range of different real estate sectors across the world – investments that would otherwise be the reserve of large institutions and high-net-worth individuals.

Risk: There can be no guarantee that the investment strategy can be successful and the value of investments may go down as well as up.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of September 2020 and may change as subsequent conditions vary.