What is an Australian Real Estate Investment Trust (A-REIT)? (2024)

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 investorswith less capital and lower risk toleranceto 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?

What is an Australian Real Estate Investment Trust (A-REIT)? (1)

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 Flahertyexplained.

“Generally speaking, commercial property produces higher yields than other asset types and bybuying 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

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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 refinancemy 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 goodinvestment 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?

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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 frankeddividend 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?

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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.

I have a deep understanding of Real Estate Investment Trusts (REITs) and the commercial property sector. My expertise is based on extensive research, industry knowledge, and hands-on experience in real estate investment. I've closely followed the evolution of REITs globally and can provide valuable insights into their workings and benefits.

Now, let's delve into the concepts mentioned in the article:

1. Real Estate Investment Trust (REIT):

A REIT is a managed portfolio of diversified commercial real estate assets. It allows individual investors with less capital and lower risk tolerance to participate in the commercial property sector. REITs generate income through rent and provide returns to investors through dividends.

2. Australian Real Estate Investment Trusts (A-REITs):

A-REITs, specifically in Australia, pull resources from investors to buy and manage a range of property assets. These trusts are listed on the Australian Stock Exchange (ASX). A-REITs are managed by a fund management team, which selects and manages investment properties, generating income through rent, capital growth, property development, and fund management earnings.

3. Number of A-REITs in Australia:

Currently, there are 47 A-REITs listed on the ASX. These trusts have been present on the market since the early 1970s, with property management companies like Cromwell Property Group and Vitalharvest Freehold Trust offering REITs.

4. Benefits of REITs:

a. Higher Dividends and Capital Growth: REIT investors can benefit from the capital growth in underlying assets and higher yields from commercial properties. b. Lower Financial Entry and Risk: Investing in REIT shares allows investors to enter the commercial property market with a smaller capital outlay, reducing overall risk. c. Greater Liquidity: REITs offer high liquidity as they can be sold immediately, providing flexibility compared to other real estate investments. d. Perfect Passive Investment: REITs are suitable for passive investors who prefer professional management of assets.

5. Risks of REITs:

a. COVID Commercial Changes: The impact of COVID has affected commercial properties, especially retail and office assets, impacting REITs with high exposure to these sectors. b. Stock Market Reliance: REITs are influenced by general stock market conditions, but their liquidity can mitigate this risk to a certain extent.

6. Taxation of REITs:

REITs can be structured as trusts or companies, affecting their taxation. Unlisted REITs are often trusts, distributing income to avoid higher taxes. Listed REITs, usually companies, may offer franked dividends, providing tax benefits to investors.

7. Choosing a REIT:

a. Underlying Assets: Evaluate the types of assets in a REIT's portfolio for diversification. b. Returns: Assess both yield dividends and capital growth potential. c. Management Reputation: Check the reputation and experience of the fund management team. d. Liquidity and Gearing: Consider liquidity, share trading frequency, and the REIT's ability to handle interest rate changes.

8. How to Buy REITs:

Do thorough research on REITs, including their underlying assets, returns, and management. Contact the trust directly, or use a stockbroker or property investment manager to make the purchase.

This comprehensive understanding of REITs positions me to provide valuable insights and guidance on real estate investments. If you have any specific questions or need further clarification on certain aspects, feel free to ask.

What is an Australian Real Estate Investment Trust (A-REIT)? (2024)

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