An Australian Real Estate Investment Trust (A-REIT) is an investment trust that owns and operates a portfolio of income-producing property. It gives investors access to property assets that might otherwise be out of reach.
Similar to managed funds, A-REITs are actively managed by a fund management team that will pool together investors’ money to invest in properties. They typically invest in commercial properties such as hotels, shopping centres, offices and apartment buildings. In Australia, they are traded on the ASX with the minimum initial investment generally being $500.
There are two main types of REITs:
- Equity REITs, which are more common and involve investing in and owning properties. These types of REITs typically generate their income by leasing out their properties and collecting rent. They can specialise in owning certain business types, or they can be diversified.
- Mortgage REITs, which are involved in the investment and ownership of property mortgages. They work by loaning money to the owners of real estate for mortgages and typically generate income through the interest generated on the loan.
One of the main benefits of A-REITs is that they provide a means of investing in the property market for individuals that may otherwise not have the money to do so. Due to the fact that each A-REIT is controlled by a fund management team, investors gain exposure to property investments without actually buying or managing one themselves. A-REITs also offer diversification benefits, as they invest in properties across multiple sectors and locations. Because the trusts trade publicly on the stock exchange, they enjoy greater liquidity than most other property investments.
There are a number of risks involved that will need to be considered before investing in A-REITs. In the same case as a managed fund, investors will need to examine the management team behind the investment, including looking at the level of debt that a trust holds. A-REITs generate a large portion of its income from rent. Therefore, if rental incomes fall, so will profits. It may be difficult to find tenants for properties if the location is poor, there is an oversupply of similar properties, or the condition of the property is below average.