Last Updated on May 10, 2023
Any equities or fixed-income portfolio should take real estate investment trusts (REITs) into account. They may offer greater diversification, higher possible total returns, and/or less overall risk. In brief, they are a great counterpoint to stocks, bonds, and cash since they can produce dividend income in addition to capital appreciation.
Commercial assets that generate income are owned and/or managed by REITs, whether they are the actual properties or the mortgages securing them. You have three options for investing in REITs: directly through the firms, through exchange-traded funds, or through mutual funds.
What are Real Estate Investment Trusts?
A business that owns, funds, or administers properties is known as a real estate investment trust (REIT), and it is obligated by law to distribute the majority of its profits to investors. Investorsmay get this income in the form of rent, or the REIT may receive it in the form of mortgage payments on loans it owns.
The REIT is allowed to escape corporate taxation on its earnings in return for paying out the majority of its taxable income. Because of their legal framework, REITs can purchase property more easily than non-REITs because it is both cheaper and easier.
In essence, a REIT makes money from the real estate it owns, and shareholders can too. When the REIT’s share price rises, you can profit from capital appreciation as well as the regular quarterly dividend payments.
Many REITs focus on a particular kind of property, but some have more varied portfolios. With a REIT, you can invest in real estate without having to pay a sizable sum of money to acquire physical property or join a real estate investment club. On major exchanges, shares of publicly traded REITs can be bought and sold.
Some of The Top REITs in Nigeria
1. UPDC REITs
Based on its net asset value, this REIT is among the biggest investment trusts in Nigeria. Closed-end investment is subject to Securities and Exchange Commission regulation (SEC).
At least 90% of the net revenue of the fund is distributed twice annually. Additionally, UPDC provides its unitholders with stable cash distributions, tax exemption on income, ownership of the investment-grade real estate, and portfolio diversification.
2. Skye Shelter Fund REITs
On the Nigerian Stock Exchange, thisis another close-ended real estate investment trust listed. The company was founded in July 2007 and finished its N2 billion IPO on the NSE in February 2008.
In this REIT, the fund managers are in charge of stock acquisition as well as opportunistic investments in joint venture initiatives. They make investments in a variety of high-end properties, including shopping centres, residences, and warehouses.
Skye Shelter Fund invests 75% of its assets in real estate and 25% in investments related to real estate, such as mortgages, securities backed by real estate, and equities with a direct connection to the real estate sector.
3. Union Homes REITs
Union Homes Savings & Loans Plc, a division of Union Bank of Nigeria, founded this REIT in 2008.
It’s a closed-end trust plan made to use real estate to produce long-term capital growth. It is a hybrid investment that provides unitholders with access to investments in a portfolio of real estate that has been approved.
Read: 10 Questions to Ask Your Landlord Before Signing a Lease
Why Invest in a Real Estate Investment Trust?
Property Management Without Headaches
The typical investor can acquire commercial real estate thanks to REITs. The investor also benefits from having seasoned property managers handle their properties to generate income without the hassles typical landlords face. Marketing, rent collecting, tenant administration, and facility upkeep are all handled by a well-chosen management team. Investors in REITs only need to take their dividends.
Appreciation
Even though equities stock price increases won’t be as significant in a strong market, commercial real estate has historically appreciated steadily over time, which has helped REITs perform well in the past. The values of commercial real estate and REIT shares are typically less affected by short-term changes in inflation and interest rates than equity stock prices. The returns on investing in bonds can be reasonable with appropriate risk, but the majority of bond classes have set values with little room for appreciation, unlike REITs.
Steady Dividends
In the case of equity stocks, management makes the decision regarding dividend payments and profit reinvestment. In contrast, REITs return 90% or more of their income to investors. Following that, investors can choose how to use their dividends. Reinvesting involves simply buying more shares if the investor so chooses. They can also use their dividends to go on vacationif they’d want. While dividends are typically constant, REITs offer the chance for higher dividends when rents rise. The rising value of the assets held by the trust also contributes to appreciation.
Low Volatility and Low Correlation
Prices for REIT shares fluctuate less than those for equity stocks. This is due to the short- and long-term predictability of rental income and management costs. Due to the relative predictability of rental income, analysts are better able to forecast REIT success than equity stock performance. Analysts’ forecasts of REIT performance are often quite accurate. Thus, share price volatility is decreased.
A limited correlation exists between the performance of REITs and that of other asset classes. This indicates that they typically behave differently from equity stocks or bonds. They are helpful for portfolio diversification because their share prices exhibit a low correlation to equities companies and other investment classes. REITs often perform better when stock prices are down, balancing the performance of your portfolio.
Risks Associated with Investing in REITs
Investors should be aware of the numerous risks connected to REIT investments. A broker is expected to disclose all the risks associated with an investment in a REIT when the investor makes the investment via them.
Liquidity risk
Public REITs permit shareholders to sell their shares on the open market, although they are less liquid than traditional investments like bonds and equities. The property has no secondary market where buyers and sellers can be found, and the only source of liquidity is the fund’s repurchase offers.
Additionally, there is no assurance that all shareholders selling their assets will be able to sell all of their shares—or just a portion of them—during the quarterly repurchase offers. Investors may be unable to convert equities into cash at the moment of immediate need as a result of this liquidity risk.
Market risk
Real estate investment trusts are traded on significant stock exchanges and are impacted by changes in the value of the underlying assets. This implies that if investors sell their shares on the open market, they can get less money than they initially invested.
Recessions, fluctuations in interest rates, natural disasters, etc. are a few examples of the sources of market risk. Market risk is difficult to remove by diversification since it often affects the entire financial market at once when any of the reasons occurs.
Leverage risk
When investors choose to buy securities with borrowed funds, leverage risk is created. Leverage leads the REIT to pay additional costs and increases the fund’s losses in the event that the underlying investments perform poorly.
The amount of money available for distribution to the company’s shareholders will decrease due to the additional borrowing costs, such as interest payments and other fees associated with the borrowing.
Should You Invest in REITs?
Adding some real estate exposure through REITs could help you further diversify and give you exposure to another asset class that may lessen risk in your portfolio, depending on your risk tolerance and portfolio goals. To determine if investing in REITs makes sense for you and how much of your portfolio you should devote to them, carefully evaluate your unique situation and speak with an investment advisor.
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