Last Updated on May 24, 2022 by Anjali Chourasiya
Real Estate Investment Trust (REIT) is an entity that owns and, in most cases, operates income-producing real estate. It owns a wide variety of commercial real estate assets, such as office and apartment buildings, warehouses, hospitals, shopping malls, hotels, and commercial forests.
Most countries’ REIT legislation allows a real estate company to pay less in corporation taxes and capital gains taxes. Unlike other real estate companies, a REIT does not build real estate properties to resell them. Instead, it buys and develops properties to manage them as components of its investment strategy. Let’s now read about the risks related to investing in REITs.
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How to invest in REITs?
Investors can invest in both listed and unlisted REITs. REITs, like other companies, can be listed on a stock market. Therefore, if you want to invest in REITs in India, you’ll need a Demat account. Another way to invest broadly in this market is through a mutual fund or exchange-traded fund (ETF) that focuses on REITs.
You can also build a diversified portfolio by purchasing a diversified REIT or investing in numerous REITs. Finally, you can invest in unlisted REITs through a financial adviser or a real estate crowdfunding site.
Risks associated with unlisted REITs
Unlisted or non-traded REITs are riskier than listed REITs since there is no publicly available information to analyse them or estimate their value. They are illiquid, and you may be unable to access their funds for a prolonged period, maybe up to 7 yrs. However, some unlisted REITs may allow you to withdraw cash after the first year for a charge.
Unlisted REITs are not traded publicly, and you cannot research their investment. As a result, calculating the REIT’s worth is difficult. Some non-traded REITs will divulge all assets and valuations 18 mths after their first public sale, which is unsettling.
Another disadvantage of investing in non-traded REITs is that dividend payments are not guaranteed. If you do receive it, it may come from sources other than the cash flow from business operations. Borrowings, the sale of offers, the sale of assets, or even the money of other investors may all be sources of funds. Such sources might dampen your excitement.
Non-traded REITs must pool money to buy and run properties, securing your cash. This pooled money may also have a darker side in the structure of dividends paid out from other investors’ money rather than income received by a property. This strategy decreases the REIT’s cash flow and the value of its shares.
Risks associated with publicly-traded REITs
Although public REITs let you sell your shares on the open market, they are less liquid than other assets such as bonds and equities. There is no secondary market for locating buyers and sellers for the property, and the fund’s buyback offers are the primary source of liquidity.
The most significant risk to REITs is increased interest rates, diminishing demand for REITs. You may prefer safer income investments, such as government bonds, in an environment where the rates rise. Treasuries are government-guaranteed securities that typically pay a fixed rate of interest. As a result, REITs fall in value as interest rates rise, while the bond market increases as capital investment streams into bonds.
Because public REITs are traded on prominent stock exchanges, their prices are subject to financial market volatility. It means that if you sell your stock on the open market, you might receive less than what you paid.
Risks associated with private REITs
Private REITs are not publicly traded on major exchanges and are not required to register with any regulatory body. As a result, they are not subjected to the same restrictions as publicly-traded REITs and unlisted REITs. Since little to no information is publicly available, you may find it difficult to evaluate them due to a lack of government regulation. They are also exempt from the requirement of providing audited financial statements. Private REIT sponsors, for example, are not required to disclose conflicts of interest. Furthermore, it might not be easy to discover any solid performance statistics on private REITs overall.
It might be tough to cash out after investing in a private REIT. Unlike publicly listed REITs, which enable you to sell shares whenever the market is open, private REITs do not allow you to do so. When it comes to the redemption of shares, each corporation has its requirements, which can be rather stringent.
REITs are a profitable investment, but they are not ideal for all investors. Furthermore, REIT yields may be comparable to those of post office schemes. REITs may have difficulty finding suitable tenants to rent out their buildings, which raises the risk of investing. Now that you’re aware of the risks associated with REITs, you may determine whether to invest in them or not.