Real Estate Investment Trusts (REITs) are typically described as instruments that offer investors an opportunity to invest in real estate such as properties or mortgages. It allows investors to access real property assets, without having to fork out a large sum of money.
REITs raise capital from these investors to purchase real estate assets, and in return, the risks and benefits of owning a portfolio of properties can be more diversified. REITs are often traded on major exchanges, similar to shares of a common stock.
REITs usually invest in a portfolio of income generating assets such as shopping malls, offices, hotels or serviced apartments, usually recognised for generating income for unit holders. Investment goals are pretty much the same as the goals of investing in stocks – income distribution and the potential long-term appreciation.
There exist mainly three types of REITs; Equity REITs, Mortgage REITs and Hybrid REITs.
- Equity REITS
Equity REITs are the most common form of REITs. They invest in and own physical properties of various kinds such as residential, retail, office, hotels, industrial and even healthcare properties. Of course, each class of REITs have varying rental yields, prospects and risks. Their incomes are derived primarily from collecting rents from properties in their portfolio, as well as any capital gains in the sale of these properties which may have appreciated in value over the years. It is easy to understand how equity REITs work, thus making it less speculative as compared to mortgage REITs. Here are some examples of different types of equity REITs listed on the SGX:-
Retail REITs: CapitaMall Trust; Centerpoint Trust
Office REITs: Frasers Commercial Trust; CapitaCommercial Trust; Keppel REIT
Hospitality REITs: Ascott REIT; CDL Hospitality Trust
Industrial REITs: Ascendas REITs; Mapletree Industrial Trust
Healthcare REITs: Parkway Life REIT; First REIT
We will not dive in-depth into what each of these REITs are. Those are meant for later chapters. Having said that, let’s move on to a more speculative type of REIT – Mortgage REITs.
- Mortgage REITs
Mortgage REITs as it sounds are REITs that invests in mortgages on real estate properties, either residential or commercial. They loan money to real estate owners in return for mortgage on a particular real estate. As such, if the real estate owner is unable to repay the loan + interest, only then will his/her property be mortgaged to these companies. Not only do mortgage REITs loan money for mortgages to owners of real estates, they purchase existing mortgages or mortgage-back securities as well.
Unlike equity REITs, mortgage REITs do not own or manage any properties in their portfolio, instead, their income are derived mainly from interest earned on these mortgage loans. Lending money generally puts mortgage REITs at a higher risk because they are exposed to interest rate risks and worst, default risks of borrowers. When interest rates rise, the value of mortgage REITs fall because investors would turn to higher performing asset classes instead. Here are some examples of mortgage REITs listed on the NYSE:-
Residential REITs: Annaly Capital Management
Commercial REITs: Starwood Property Trust
- Hybrid REITs
Lastly, Hybrid REITs as the name sounds is a combination of both Equity and Mortgage REITs. They invest and own both physical properties as well as property loan. As such, investors are able to diversify across both types of investments where they get the benefits of both but with lesser risks. In reality however, most hybrid REITs are usually more invested in one type of investment than the other. There is rarely an even balanced of both types of investments.
So the question boils down to which should you invest in? Have you found out what is your investor personality type? (Read more: Which Investor Personality Type Are you?) Like any other investment, it is important that it has good profits, strong balance sheets, less debt and high dividends (preferably). So what would your choice eventually be?
Disclosure: I do not have any positions in the above mentioned REITs at time of writing and have no plans to initiate any positions within the next 72 hours. I wrote this article myself and the calculations made are my own and are not intended as investment advice. I am not receiving any paid compensation for it and I have also no business relations with any company whose stock is mentioned in this article.