ASX REIT Stocks: Real Estate Investment Opportunities 2023

What is a Real Estate Investment Trust (REIT)?

Real estate investment trusts, or REITs," facilitate individual investor’s investments in large, integrating, sprawling income-generating real estate assets. A REIT is basically a diversified and professionally managed portfolio of real estate assets that enables investors to access a property portfolio. It is a company that owns and typically operates income-producing real estate or related assets, such as office buildings, shopping malls, apartments, hotels, resorts, and warehouses. A REIT does not develop real estate properties to resell them back, as other real estate companies do. Rather, a REIT buys and develops properties to operate them as part of its own real estate investment portfolio. Australian REITs would invest in property either in Australia or abroad. Investors can benefit from any increase in value in the underlying asset and from regular rental income generated from the properties owned.

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How do REITs Work?

Australian REITs are generally managed by a fund manager; their job is to select worthy investment properties and manage them on behalf of investors. Other than rents, REITs produce income through capital appreciation, property price growth, property development, and other property-related fund management income generations.

REITs basically pull resources collectively from investors, allocate investments proportionally to a wide variety of worthy property assets, and then manage them for income generation. Most of the income generation takes place through property rental income, which they distribute in the form of dividends to the investors

What are the Pros and Cons of Investing in REITs?

REITs offer a diversification benefit to individual investors by adding real estate to their investment portfolio. Moreover, some REITs have higher dividend yields compared to some other investment asset classes. But there are some risks associated with non-listed REITs due to their non-transaction on a stock exchange, which involve the following special risks:

Generally, non-traded REITs are illiquid investments that cannot be easily sold on the open market. In the event that someone needs to sell an asset to raise money in an emergency, it is not difficult to do so with shares of non-listed REITs. While the market price of an exchange-traded REIT is easily accessible, it can be difficult to determine the value of a share of a non-exchange-traded REIT. Investors may be attracted to non-traded REITs by their relatively high dividend yields compared to exchange-traded REITs. Unlike exchange-traded REITs, non-exchange-traded REITs pay distributions in excess of their funds from operations to attract common shareholders attention. The other most sensitive part of the non-exchange-traded REITs has an external manager instead of deploying their own employees within the organization. This can lead to potential conflicts of interest with common shareholders. For example, the REIT may reward excess fee to the external manager based on the number of property acquisitions and assets under management. Fee-based incentives may not suit common shareholders decisions.

Types of REITs

A-REITs are listed on the ASX and are investment instruments that provide exposure to property assets such as office towers, shopping malls, industrial buildings, and even hotels and cinemas. These are pooled investments, overseen by a professional manager, managed like any other managed fund, and because they are listed on the ASX, someone can buy and sell them through authorized person in the same way as stocks. By investing in REITs, you can select from a range of sectors and investment styles, depending on individual investment outlook and goals. REITs have been classified in different ways, as follows:
Diversified: Often larger and more established funds, these A-REITs offer a broadly diversified portfolio covering most or all of the major commercial property sectors. REITs potentially cover the varied geographical diversification and tend to minimize risks that are associated with an economic downturn in one particular state or area.

Sector-specific: Many Australian REITs specialize in a particular commercial property sector, usually falling into one of these categories:

•    Investing in office buildings or premium towers.
•    Investing in shopping malls, high-street retail shopfronts, and specialty outlets
•    Industrial: investing in warehouses, factories, distribution centers, and other industrial facilities, such as oil refineries
•    Investing in hotels, cinemas, theme parks, and other leisure facilities

Specialist: Some Australian REITs focus on specialist investments falling outside the traditional commercial property sectors and often requiring specialized management skills, for example, data centers, healthcare facilities, and pubs.

International: While most Australian A-REITs focus on the local market, some give investors access to international property, typically in the US or Europe.

Stapled: Some Australian REITS trade as stapled securities, typically consisting of one unit in a property trust ‘stapled’ to a share in an associated company. The trust holds a portfolio of property assets, while the related companies act as fund managers or undertake development opportunities.

Because the two securities trade together, investing in a stapled security means taking a position on the performance of both the property portfolio and the related company; this may have very different investment characteristics. 

How to Invest in REIT?

Someone can look for an exchange-traded REIT, which is listed on an Australian stock exchange, by buying shares through a broker. Investors can purchase shares of a non-exchange-traded REIT through a broker that participates in the non-exchange-traded REIT’s offering. REIT mutual funds or REIT exchange-traded funds can also be looked at.

Tax Implications of REIT Investing

An investor should understand whether a REIT is a trust or companies because of the varied rule applications between them. Generally, unlisted REITs are trusts that never retain their income, while listed REITs are usually companies that might choose to retain income to reinvest in their growth assets to increase profitability, for instance. Trusts have to distribute their income; otherwise, they’re taxed at a higher rate. But a company will need to distribute franked dividends where tax has already been paid. Therefore, you will get tax benefits just like you would if you bought shares. REIT investors won’t have to pay "double tax," but it’s important to understand if the REIT has paid tax and whether it’s a franked dividend or just pure income, which tends to be the case with unlisted trusts. According to ASX, Australian REITs can also sometimes feature tax-deferred contributions when a REIT investor’s income is higher than their taxable income.

10 Australian REITs to Watch on the ASX 2023

REITs are basically providing an option to participate in large-scale, premium assets by having shares in their portfolio. An investor investing in an REIT is generally affected by property valuations, unlike owning the property. Let’s look at the 10 best Australian REITs to watch on the ASX for 2023 (M-cap and share price as of 28 August 2023).

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Frequently Asked Questions (FAQ)

Can you buy REITs on ASX?

Australian REITs are listed on the ASX and are investment instruments that provide exposure to property assets such as office towers, shopping malls, industrial buildings, and even hotels and cinemas. Someone can buy and sell them on the Australian stock exchange through an authorized person in the same way as stocks.

Are there REITs in Australia?

Goodman Group (ASX: GMG) is a global integrated property group with operations throughout Australia, New Zealand, Asia, Europe, the United Kingdom, North America, and Brazil. GMG is comprised of the stapled entities Goodman Limited, Goodman Industrial Trust, and Goodman Logistics Limited. 

Stockland Corporation Limited (ASX: SGP) is a diversified real estate group in Australia that has a diversified land bank. It creates master-planned and land-lease communities and curates connected precincts across our town center, logistics, and workplace portfolios.

Should I invest in REITs Australia?

REITs provide an individual investor with the opportunity to invest in a large, integrating, sprawling income-generating real estate asset. Australian REITs offer diversification and a professionally managed portfolio of real estate assets that enable investors to access a property portfolio.

What are the returns on Australian REITs?

There are ETFs that have generated negative returns; let’s look at some ETFs that have generated positive returns.
Stockland (ASX: SGP) is a diversified real estate group in Australia that has a diversified land bank that has produced a 15% return in the last year (as of August 28, 2023).

Mirvac Group (ASX: MGR) is involved in the Australian development and construction industry, which has performed by 12.44% in the last year (as of August 28, 2023).

What is the 90% rule for REITs?

The IRS issued revenue procedures 2021-53 on Nov. 30, which allowed a 90% stock/10% cash distribution with respect to dividends declared by publicly offered REITs on or after November 1, 2021, and on or before June 30, 2022.

Are REITs riskier than bonds?

There are significant differences between REITs and bonds. To start, a bond is a debt financial instrument, and a REIT is an equity investment. Generally, a bond’s value is driven by the financial strength of the issuer, while a REIT’s value is driven by the performance of the properties in their investment portfolio. Finally, a bond has a fixed maturity date, whereas a REIT has an open-ended maturity. 

Are REITs riskier than stocks?

REITs are reliable, hands-off, and also offer dividends, but investing in stocks carries a higher level of risk but has high potential for generating an exponential return. Investors should always diversify their portfolios by buying both stocks and REITs. Because diversification helps investors personalize the experience, it also helps to invest in a variety of different industries, investment categories, and risk tolerances. This enables investors to minimize risk, hedge against market downturns, and even overcome future inflation barriers.

Will REITs crash if interest rates rise?

A normal interest rate rising scenario will not have much impact on the REITs performance or marginally remain underperforming for the short to medium term, but if a scenario like in 2009 repeats itself, then a crash could be expected. In an ideal scenario, in general, REITS perform better than 10-year Treasury bills; it goes like this: if the 10-year Treasury is up by approximately 2%, then REITs will go up by approximately 5%.