ASX REITs: Should you invest in them in FY24?

ASX REITs offer the opportunity for investors to access the property market, but without buying properties individually.

Sounds great, doesn’t it? But, as with any asset class, it is important for investors to do their homework about them – given the past few years of headwinds.

 

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ASX REITs: What are they?

REITs (Real Estate Investment Trusts) are publicly traded companies that own or finance income-producing real estate. They can provide investors with potentially higher returns than other investments due to their focus on the real estate sector.

REITs invest in a variety of properties, such as office buildings, shopping malls, apartments, hotels, and warehouses. Investors may purchase shares of REITs on the stock exchange, just like they would any other publicly traded company.  

REITs distribute at 90-100% of their profits. This helps ensure that investors have a steady stream of income from their REIT investments.  

 

Why would you consider investing in REITs?

The benefits of investing in a REIT include diversification, liquidity, yield potential, and professional management. As an investor, you will have access to more types of real estate investments than you would if you held individual properties. Additionally, since the shares are traded on public exchanges like stocks or bonds, they allow for greater liquidity than owning a single property.

REITs also have the potential to generate larger returns than many other types of investments, particularly when compared to bonds and stocks. Depending on the type of REIT you purchase, you could earn dividend yields as high as 8–12%. In addition, professional management will ensure that your investment is managed properly and in accordance with your goals.

Finally, REITs can provide a tax benefit for investors who hold their shares for long periods of time. When dividends are paid out to shareholders, those dividends may qualify for special treatment under the federal tax code. This means that some or all of your dividend income could be subject to capital gains taxes instead of ordinary income taxes, which can result in significant savings for investors.

In short, REITs offer an easy and efficient way to invest in real estate without the headaches that come with owning a physical property. With the potential for income, diversification, liquidity, and tax advantages, investing in REITs can be an excellent addition to your portfolio.

What are the risks of investing in REITs?

The most common risk associated with REITs is their volatility. Just like any other security, the prices of REITs tend to fluctuate and can be unpredictable at times. This means that there’s always a chance that you could lose money if you invest in them.

Another risk with REITs is that they tend to be highly correlated with the wider property market – and even the economy. This means that if there’s a downturn in the property market generally (or the specific market segment your REIT is focused on), the value of your REIT investments can go down significantly. For instance, many REITs still have not recovered from the Corona Crash – particularly those with exposure to the office space given the rise in remote working.

It’s also important to keep in mind that REITs are subject to taxation, which can eat into your returns – worse than would be the case if you invested in property directly.

Finally, there’s also a risk of a lack of liquidity when it comes to investing in REITs. There are many companies out there that do poor Investor Relations and miss out – even if they are otherwise good companies.

It’s important to do your due diligence and thoroughly research any potential investments before committing money.

So should you invest in them?

In our view, some ASX REITs might be worth investors’ consideration. It is up to all investors to do their due diligence on individual funds. But we think investors should stay away from the office space because it is not clear when (or indeed if) the market for office space will return to pre-COVID levels.

Sectors investors may want to consider include social infrastructure and industrial properties, although it is up to investors to look at each opportunities.

 

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