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Get property investment at arm's length

Owning commercial property in New Zealand is out of reach for many Kiwis. Listed property shares are a great alternative, says Chris Smith.

10 January 2022


You’d like to diversify into property, but you can’t afford to buy a building? There’s an easy answer.

Thanks to the stock market and real-estate investment trusts (REITs), anyone can invest in residential and commercial real estate without having to buy or manage the physical assets.

REITs are companies listed on the stock exchange that own or finance income-producing real estate or related assets.

The financial services industry has made it easy to invest in a diversified portfolio of commercial real estate assets by developing ‘exchange-traded funds’ (ETFs) invested in the sector.

Every major share market around the world generally has listed REITs – ranging from shopping malls to massive commercial office buildings, famous landmarks, and large-scale residential properties.

REITs have historically given investors attractive total returns, with higher income from dividends and share price appreciation, rather than just capital growth.

If there’s a market dip, REITs, being a property asset, are quite defensive. They’re usually a stable investment because leases are long term, so they keep giving investors dividends.

There are thousands of different REITs to choose from, so you can select your investment with less emotion than you do when you’re buying shares in a single company.

The rise of the REIT

Real estate is one of the oldest investments, but REITs are relatively new on the scene, having only been around since 1960.

Their structure allows many investors to pool their money together, so there’s more capital for real-estate development.

On the other hand, their business model means that companies don’t have to hold on to properties forever and can sell their assets if prices rise. This structure makes them attractive, so they’re popular among investors.

There are hundreds of REITs listed, from the giants of the industry like Simon Property Group or local listed options, Precinct and Goodman Property. But they aren’t the only way to invest in real estate through the stock market.

Some non-REIT companies own many real-estate assets and conduct other real-estate activities. There are also manyother companies that don’t actively own or manage real estate but stand to benefit from strength in the real-estate market.

Pros and cons of investing in REITs

Pros:

• Dividends are usually higher than other shares

• You can diversify your portfolio

• They are a very liquid investment (which means easy to buy and sell) being listed on an exchange

• They give you access to global investment markets.

Cons:

• Dividend payouts are taxed as ordinary income

• They’re sensitive to interest-rate fluctuations

• Specific types of properties may create added risk

• You have less control, compared to physical assets

• Debt ratios – some REITs are too highly geared.

New Zealand options

The Smartshares NZ Property ETF invests in property assets listed on the NZX Main

Board and is designed to track the return on the S&P/NZX Real Estate Select Index.

This index has exposure to all major listed property funds in New Zealand.

Global options

• The Vanguard Real Estate ETF is a giant among REIT ETFs, with more than 10 times the assets under management of its nearest competitor. It invests in REITs and other real-estate shares.

• Simon Property Group is an American real-estate investment trust that invests in shopping malls, and community and lifestyle centres. It’s the largest owner of shopping centres in the United States, owning interests in over 200 properties totalling 22.4 million square metres.

• Realty Income Corporation is a real estate investment trust that invests in freestanding single-tenant commercial properties in the United States, Puerto Rico, and the United Kingdom. The company owns over 6,483 properties (making up over 9.8 million square metres) and includes as its largest tenants Walmart, Walgreens, and FedEx.

What else to think about

The REIT is an investment that relies on dividend income, so its management cost is important. This varies according to the size of the fund, their own financing costs, and their portfolio.

At the right end of low costs for funds is the Vanguard Real Estate ETF. With just a 0.12 per cent expense rate, it’s more than 50 per cent below the industry average of 0.28 per cent in America.

Before investing, you should carefully consider the real-estate market, the REIT’s business model, payout ratio, leverage, and the stock’s sensitivity to interest-rate changes.

Asset value increases, rent increases, and rising dividend returns are positives for investors, but the Covid-19 pandemic and the work-from-home movement could negatively affect the type of property assets you want your hard-earned investment dollars chasing.

Disclaimer: CMC Markets is an execution-only serviceprovider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice onwhich reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security,transaction or investment strategy is suitable for anyspecific person. The author does own shares in some of the securities mentioned.


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