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