The Motley Fool

Why ASX REITs could be better than an investment property

It’s no secret that Australians love, love, love everything property. After all, it’s the ‘great Australian dream’ to own one’s house and an even better reverie to own an investment property or three.

But with property prices on the rebound after a brief slump, could REITs be a better investment today?

What are REITs?

A REIT is a real estate investment trust – meaning a listed company that owns land and rents it out for profit (essentially a corporate landlord). Because REITs have a stable base of assets requiring little ongoing expenses, these companies have the ability to pass on their rental profits to their shareholders in the form of dividend distributions.

What are the advantages of a REIT?

As any landowner would know, rental properties come with a lot of expenses and hassles. There are land taxes, insurance, stamp duties and of course, ongoing maintenance of the property (including the dreaded ‘midnight toilet malfunction’) to worry about– not to mention the danger of a questionable tenant.

With a REIT, all of these hassles and expenses are handled by the company – with you as the owner exempt from worry.

Many REITs, such as BWP Trust (ASX: BWP) only rent industrial land to clients such as Wesfarmers Ltd (ASX: WES)’s Bunnings Warehouses. No tenant risks, no midnight phone calls, just consistent profits.

According to recent data from property company Domain Holdings Australia Ltd (ASX: DHG), the gross average rental yield from a Sydney or Melbourne house is around 3.3% (and that’s before costs).

Compare this to BWP at 4.27%, or Scentre Group (ASX: SGP)’s yield of 4.94% (both after expenses) – and I think we have a winner.

But what about capital growth, I hear you say. Sure, Sydney and Melbourne house prices have been growing at double digits for most of the last decade.

But consider that the ASX’s biggest REIT Goodman Group (ASX: GMG) is up nearly 1,000% over the last 10 years. Although not as impressive, BWP shares are also up over 165% over the same period. REITs can offer a lot of capital growth potential as well.

Foolish takeaway

Although you can’t use gearing as effectively with REITs as you can with property, I think every other comparison has REITs coming on top over investment properties in today’s market. Something to consider when looking for property number four!

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. 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.

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