Real Estate Investment Trusts (REITs) have today become a key consideration while building any kind of equity or fixed-income portfolio. They provide you with greater diversification, low risk, and potentially higher total returns. REITs have the capability of generating dividend income along with capital appreciation, and this makes it an excellent counterbalance to stocks and cash. Whether it is the property itself or the mortgage on that property, the real estate investment trust manages the income-producing on these commercial real estate properties.
If you want to invest in some companies individually through a mutual fund or an exchange-traded fund, many several types of REITs are available. Below we have listed some of the main Real Estate Investment Trust categories along with their history of returns that could help you to get an idea about when and what to buy.
The investment in Retail REITs accounts for approximately 24% that includes freestanding retails and shopping malls. Whichever shopping complex you can find is very likely to be owned by REIT. Before investing in any type of REIT, it is necessary to examine its future.
The retail REITs earn their money from the rent that they charge from the tenants. It might be possible that the shop retailers experience bankruptcy or poor cash flow. So always ensure to get strong anchor tenants like grocery or general stores. The next most important focus point in any investment is to see if they are having good profits, strong balance sheets, and very less amount of debt.
Office REITs invest in office spaces and receive their rental income from the tenants who take the office spaces. Before investing in an office REIT makes sure to look into the state of the economy, its unemployment rate, the vacancy ratio, and the capital for acquisitions. Even the location or the area where the REITs invest matters, for example investing in metro cities would provide you with greater profits as compared to the non-metro cities. Research about the REITs that invest in strong economic areas before selecting one.
Healthcare REITs have also emerged as an interesting sector. Retirement homes, medical centers, and hospitals are the type of real estate where healthcare REITs invest in. Since the pandemic, we’ve seen a good percentage of success in this sector. The occupancy fees, medical supplies, and medical reimbursements become the source to earn for healthcare REITs.
Necessary things to look at while investing in healthcare REIT are to have a diversified group of customers and funding from different areas. If there is a growth in healthcare services then it’s a good time to invest in this sector of real estate. In addition to this lookout for companies that have strong balance sheets and significant experience in healthcare before.
We all are aware of the fact that the real estate sector is one of the best-performing assets among all the sectors of industry. There are some key points that you need to keep in mind while assessing any kind of REITs.
- The quality of REITs you invest in matters. So invest in those REITs that have good properties and tenants.
- There could be a decline in property value due to depreciation. It is therefore recommended to look at the funds from operations (FFO) of a REIT instead of using the pay-out ratios to assess a REIT. The FFOs is the net income less the sale of a property in a particular year and depreciation. You simply have to take the dividend per share and divide it by funds from operations per share. The higher the value of it, the better it is.
- As we know that the REITs are investments with total returns, and so they provide you with high yields of dividends and moderate appreciation of long-term capital. So look for such companies which have a great history in providing both the benefits together.
- Search for the kind of companies that has a good management team with a lot of good experience or the companies that have been in the market around for a while.
- The majority of REITs are traded on stock exchanges. So unlike traditional real estate, here you get an opportunity to invest without being locked in for a long duration.
Today as we can see the commercial spaces are focusing on aspects like health and wellness, eco-friendly spaces, touch-less sensors, and other aspects. And this kind of shift has led to high-quality products for a business ecosystem that is provided by Indian REITs. Therefore it is clearly visible that the investment in the commercial sector is more on the positive side and REITs have recorded stable occupancy levels here. So the future of REITs is surely promising.