retail industry itself. Is it financially healthy at present and what is the outlook for the future?
It’ s important to remember that retail REITs make money from the rent they charge tenants. If retailers are experiencing cash flow problems due to poor sales, it’ s possible they could delay or even default on those monthly payments, eventually being forced into bankruptcy. At that point, a new tenant needs to be found, which is never easy. Therefore, it’ s crucial that you invest in REITs with the strongest anchor tenants possible. These include grocery and home improvement stores.
Residential REITs These are REITs that own and operate multi-family rental apartment buildings as well as manufactured housing. When looking to invest in this type of REIT, one should consider several factors before jumping in. For instance, the best apartment markets tend to be where home affordability is low relative to the rest of the country.
Within each specific market, investors should look for population and job growth. Generally, when there is a net inflow of people to a city, it’ s because jobs are readily available and the economy is growing. A falling vacancy rate coupled with rising rents is a sign that demand is improving. As long as the apartment supply in a particular market remains low and demand continues to rise, residential REITs should do well.
Healthcare REITs Healthcare REITs will be an interesting subsector to watch as Americans age and healthcare costs continue to climb. Healthcare REITs invest in the real estate of hospitals, medical centers, nursing facilities and retirement homes. The success of this real estate is directly tied to the healthcare system. A majority of the operators of these facilities rely on occupancy fees, medical aid reimbursements and private pay. As long as the funding of healthcare is a question mark, so are healthcare REITs.
Things you should look for in a healthcare REIT include a diversified group of customers as well as investments in a number of different property types. Focus is good to an extent but so is spreading your risk. Generally, an increase in the demand for healthcare services( which should happen with an aging population) is good for healthcare real estate.
Office REITs Office REITs invest in office buildings. They receive rental income from tenants who have usually signed long-term leases. Four questions come to mind for anyone interested in investing in an office REIT
1 What is the state of the economy and how high is the unemployment rate? 2 What are vacancy rates like? 3 How is the area in which the REIT invests doing economically? 4 How much capital does it have for acquisitions?
Try to find REITs that invest in economic strongholds such as Johannesburg as opposed to a smaller city.
Mortgage REITs Approximately 10 % of REIT investments are in mortgages as opposed to the real estate itself. But just because this type of REIT invests in mortgages instead of equity doesn’ t mean it comes without risks. An increase in interest rates would translate into a decrease in mortgage REIT book values, driving stock prices lower. In addition, mortgage REITs get a considerable amount of their capital through secured and unsecured debt offerings. Should interest rates rise, future financing will be more expensive, reducing the value of a portfolio of loans. In a low-interest rate environment with the prospect of rising rates, most mortgage REITs trade at a discount to net asset value per share. The trick is finding the right one.
The Keys to Assessing Any REIT The following are a few things to keep in mind when assessing any REIT.
1 REITs are true total-return investments. They provide high dividend yields along with moderate long-term capital appreciation. Look for companies that have done a good job historically at providing both.
2 Unlike traditional real estate, many REITs are traded on stock exchanges. You get the diversification real estate provides without being locked in long term. Liquidity matters.
3 Strong management makes a difference. Look for companies that have been around for a while or at least possess a management team with loads of experience.
4 Quality counts. Only invest in REITs with great properties and tenants.
5 Consider buying a mutual fund or ETF that invests in REITs, and leave the research and buying to the pros.
www. reimag. co. za MAY 2016 SA Real Estate Investor 25