It’s no secret many property markets have slowed. The finance landscape has changed and capital growth is going to be harder to achieve going forward. Investors in these markets may want to look elsewhere for returns over the next few years. Property investors as a group tend to love the security of owning physical assets, and the fact that prices tend to be less volatile since property isn’t traded daily like shares. This makes them shy away from the sharemarket, due to the volatility and the often intangible nature of owning a company’s shares. Enter REITs……
It’s no secret many property markets have slowed. The finance landscape has changed and capital growth is going to be harder to achieve going forward. Investors in these markets may want to look elsewhere for returns over the next few years.
Property investors as a group tend to love the security of owning physical assets, and the fact that prices tend to be less volatile since property isn’t traded daily like shares. This makes them shy away from the sharemarket, due to the volatility and the often intangible nature of owning a company’s shares. Enter REITs…
Real Estate Investment Trusts (REITs)
REITs, or listed property trusts, are pretty simple to understand. They are either a company or a trust, listed on the sharemarket, which invests in property of all types, such as industrial, retail, office etc.
You can buy shares (or units) in a REIT the same as you would any other company. I think this type of investment is the perfect way for a property investor to get started investing in the sharemarket. The REIT owns physical property, collects the rental income, and passes it onto the end shareholder (unitholder) in the form of dividends (called distributions).
Many REITs own buildings we probably pass by every day – like Westfield shopping centres owned by Scentre Group (ASX: SCG), and Bunnings Warehouse properties, owned by BWP Trust (ASX: BWP) and rented to Wesfarmers Limited (ASX: WES).
Over time as the property portfolio grows in value, this is usually reflected in the share price. And as the rental income increases over time, so will the income received by the investor. Here’s a couple of good quality REITs to get you started…
Viva Energy Reit Ltd (ASX: VVR)
A pretty simple to understand business. This REIT owns over 400 service stations around the country, almost all are leased to Shell Coles Express.
The weighted average lease expiry (WALE) is 13 years, meaning it’s a very reliable source of long-term cashflow. There’s also built-in rent increases with those leases, which average 3% per annum. That’s a wonderful feature. Because while we don’t know what will happen on the sharemarket, or in the property markets during that time, we know if our rental income keeps climbing over the years, the underlying value of that real estate rises too.
Shares trade on a forecast yield of 6.4%.
Centuria Metropolitan REIT (ASX: CMA)
Centuria owns a portfolio of office buildings around $900 million. It’s currently raising money to acquire a further 4 buildings to add to its portfolio, which are in targeted inner metropolitan locations.
The portfolio is diversified between major cities in Australia and the occupancy rate is 97.8%. Future rent increases are locked in at an average of 3.6% per annum. Again, this underpins future cashflow and means the underlying portfolio should be worth much more a decade from now.
Best of all, shares are currently trading on a very attractive yield of 7.5%.
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Motley Fool contributor Dave Gow owns shares of Centuria Metropolitan REIT and Wesfarmers Limited. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.