How to Invest With Real Estate Investment Trusts (REITs)

Any equities or fixed-income portfolio should consider real estate investment trusts (REITs).

They can offer greater diversification, higher total returns, and/or less overall risk.

REITs are a great counterpoint to stocks, bonds, and cash since they can produce dividend income and capital appreciation.

Commercial assets that generate income are owned and/or managed by REITs, whether the actual properties or the mortgages securing them.

You have three options for investing in REITs: through the firms, through exchange-traded funds, or through mutual funds.

What Are Real Estate Investment Trusts?

A real estate investment trust (REIT) is a business that owns, funds, or administers properties.

It is obligated by law to distribute the majority of its profits to investors.

Investors may receive 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 can 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 quickly than non-REITs because it is both cheaper and easier.

In essence, a REIT makes money from its real estate, and shareholders can too.

When the REIT’s share price rises, you can profit from capital appreciation and 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 paying a sizable sum of money to acquire physical property or join a real estate investment club.

On major exchanges, publicly traded REIT shares can be bought and sold.

Read: Future of Real Estate Investing: Smart Home Technologies

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 fund’s net revenue is distributed twice annually.

Additionally, UPDC provides its unitholders with stable cash distributions, income tax exemption, ownership of investment-grade real estate, and portfolio diversification.

2. Skye Shelter Fund REITs

This is another close-ended real estate investment trust listed on the Nigerian Stock Exchange.

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 and opportunistic investments in joint venture initiatives.

They invest 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 related investments, 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 Union Bank of Nigeria division, founded this REIT in 2008.

It’s a closed-end trust plan that uses real estate to produce long-term capital growth.

It is a hybrid investment that provides unitholders with access to an approved real estate portfolio.

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.

Investors also benefit from having seasoned property managers handle their properties to generate income without the hassles typical landlords face.

A well-chosen management team handles marketing, rent collecting, tenant administration, and facility upkeep.

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.

This 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.

However, most bond classes have set values with little room for appreciation, unlike REITs.

Steady Dividends

In the case of equity stocks, management decides 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 vacation if they want.

While dividends are typically constant, REITs offer the chance for higher dividends when rents rise.

The rising value of the assets the trust holds also contributes to appreciation.

Low Volatility and Low Correlation

Prices for REIT shares fluctuate less than those for equity stocks.

This is due to rental income and management costs’ short- and long-term predictability.

Due to the relative predictability of rental income, analysts can better 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 REITs’ performance and that of other asset classes.

This indicates that they typically behave differently from equity stocks or bonds.

REITs 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.

Read: 10 Top Real Estate Investments in Luxury Hotels

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 due to 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, and other sources of market risk are a few examples.

Market risk is difficult to remove by diversification since it often affects the entire financial market at once when any of these reasons occur.

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 if 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.

Read: How Real Estate Investing Works

Should You Invest in REITs?

Adding real estate exposure through REITs could help you further diversify and expose you 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.

Conclusion

Investing in REITs offers a compelling opportunity to diversify your portfolio with real estate exposure without the complexities of managing physical properties.

By understanding the risks and benefits, you can make informed decisions that align with your financial goals.

Whether you seek steady dividends, low volatility, or potential capital appreciation, REITs can be valuable to your investment strategy.

As always, consult an investment advisor to tailor your approach to your unique situation and risk tolerance.

With the right strategy, REITs can enhance your portfolio and help you achieve long-term financial success.

Before You Go…

Hey, thank you for reading this blog post to the end. I hope it was helpful. Let me tell you a little bit about Nicholas Idoko Technologies.

We help businesses and companies build an online presence by developing web, mobile, desktop, and blockchain applications.

We also help aspiring software developers and programmers learn the skills they need to have a successful career.

Take your first step to becoming a programming expert by joining our Learn To Code academy today!

Be sure to contact us if you need more information or have any questions! We are readily available.