Investors can gain exposure to the real estate sector by investing in one of the many real estate investment trust (REIT) companies. Simply put, a REIT refers to any company that either owns, operates, or finances real estate assets that generate income.
REITs are broad-based and extend beyond traditional real estate properties most are familiar with, like residential apartments and office buildings. Rather, REITs can include companies that own cell towers, energy pipelines, data centers, malls, warehouses, public storage facilities, hotels, medical offices, and much more.
Understanding the legal definition of how a company qualifies as a REIT is an important step in answering is REIT a good investment. By law, a US company must satisfy multiple traits as defined by the Internal Revenue Code.
How to invest in REITs
REITs trade on a public market in the exact same way as traditional stocks. But there is one notable difference. So why invest in REITs? A REIT intends to generate consistent income for investors through a dividend instead of growing capital through stock value appreciation.
In fact, profits generated by a REIT are never taxed at the corporate level which means extra cash that can be passed on to investors. It should be noted investors will still pay a tax rate on dividends that are consistent with their ordinary income tax rate.
Investors can also buy REIT stocks through the use of a Contract for Difference (CFD). Simply put, a CFD is an agreement between an investor and a broker to exchange the difference between the beginning and the end of a contract, speculating on the instrument’s price fluctuations.
A CFD is particularly attractive for REIT shares because it gives investors potential to gain from growth without committing a lot of capital. On the other hand, an investor can use a CFD to take a short position, meaning the investor can profit if real estate values drop during periods of economic hardship.
Here are some examples of the largest and different types of REITs that investors can buy.
- Crown Castle is the largest provider of shared communications infrastructure that covers 70,000 route miles of fibre.
- Prologis owns nearly 4,000 logistics facilities worldwide.
- Simon Property Group is the largest US shopping mall operator that owns or has a stake in more than 325 properties.
- Public Storage operates self-storage services with more than 2,200 locations in the US, Canada, and Europe.
Why invest in REITs?
Now that we have established what is a REIT and how it differs from stocks, it is time to answer the question: are REITs a good investment? The simple answer is it depends on the individual wants and needs of an investor.
As already noted, a REIT focuses nearly exclusively on generating dividends for investors. As such, those expecting 40%-plus returns are better off looking at other sectors, like innovative biotechnology, cloud storage, or artificial intelligence-focused companies trying to change the future.
REITs are more suitable for investors that require a steady dividend, especially those at or near retirement age. But younger investors may still want to invest in REITs online to protect their portfolio from large market moves. Typically, many REITs offer low correlation with other stocks. REITs that operate in sectors with durable demand during economic difficulties are considered the best REITs to invest in.
So what are some of the best REIT stocks to buy during economic downturns, such as the current one where GDP is expected to shrink and unemployment rates soar during and after the coronavirus pandemic? Key to picking what REITs to invest in is to understand the current situation.
Hundreds of millions of people are currently in some form of quarantine or at-home orders. This certainly spells bad news for mall operators as the vast majority of shopping malls are closed and it is unclear how many tenants will be able to continue paying rent moving forwards.
So, what industries are mostly operating business as usual during these hard times? For the most part, grocery stores. People will always need to buy food, and instead of investors trying to pick and choose which grocery retail chain will outperform, a REIT like Brixmor Property Group offers an alternative option.
Brixmor Property owns and operates the largest wholly-owned portfolio of grocery-anchored community and neighbourhood shopping centres.
Trade Brixmor Property Group - BRX CFD
The case for investing in Brixmor Property is based on the logic that visits to grocery stores are – and will remain – essential, regardless of economic conditions. Brixmor’s side-tenants, such as dollar store chains and off-price retailers, should see a spike in demand as more consumers prioritise spending less money without compromising their traditional buying habits.
Another example of a REIT sector that could see a surge in demand is self-storage companies. The unfortunate reality is millions, if not tens of millions of people, will experience economic hardships. Many of them may be in a situation where they have to sell their houses and downsize for strictly financial reasons. They may have a new need to rent storage space for their belongings that can’t be brought to their new homes.
Conclusion: know what you are buying
REIT trading may be more suitable for certain investors than others and it is important for investors to fully understand what they are buying. The biggest mistake an investor can make is buying shares of an asset they don’t fully understand.
REITs are meant to offer stable, consistent, long-term dividends at the expense of share appreciation growth. This is by design and investors need to take the time to make sure this fits in with their overall objectives, both short-term and long-term.