December 5, 2023

Exploring REITs through capital raisings

Capital raisings can be a great entry point into real estate investment trusts, but there are a few things to consider to get your strategy right

Investing in REITs

In Australia, Real Estate Investment Trusts (REITs) have long been considered a good alternative to traditional property investment, as investors can include various property types, such as commercial, industrial, and retail assets to complement their residential property portfolio.

Many REITs are also geographically diversified, mitigating the risk associated with one area or location. In addition, REITs are managed by professionals who are tasked with sourcing, financing, managing, and selling the property, so investors can be freed from the onus of property ownership. And in many cases, REITs can focus on a certain type of property, such as logistics or healthcare, which require highly specialised skills to manage.

Typically, investors seek regular income from distributions from REITs, however, depending on the structure of the REITs, capital appreciation may also be a key consideration.

REITs capital raisings come in two forms, listed and unlisted.

 

Understanding capital raisings for unlisted REITs

 

Many unlisted funds are closed investments. That means once the initial capital is raised the fund does not take on new investors. If more capital or new investors are required, the fund may undertake a capital raising. In Australia, capital raisings are an important entry point to unlisted REITs.

Capital raisings for REITs are usually associated with requirements for purchasing additional property. Investors should review and understand the following before participating.

 

  • Property type & value – The types and quantities of properties to be purchased. Do they align to the trust’s portfolio? Where are the properties located? Are there refurbishments planned to add value? What is the outlook for the property types? (e.g. office space, warehouse, industrial, retail)
  • Distribution – Funds usually provide guidance on their distribution rate so investors’ can determine an income rate. Distributions may be affected by property occupancy rates, management costs, and some other factors like unforeseen fire or storm damage.
  • Leverage – Typically, REITs leverage debt to purchase trust assets. Leverage can amply returns and losses and change the risk profile of a trust. As leverage increases so too will the fund’s interest costs, which may impact returns.
  • Unit Price – investors enter REITs by purchasing units of the fund. Unit value is based on the trusts Net Asset Value (NAV) or Net Tangible Asset (NTA) per unit. Although these values are normally calculated daily, unit prices fluctuate the most when properties are bought, sold, or revalued. It is normal for unit prices to be adjusted downward after property purchase as there are costs associated with the transaction.
  • Withdrawal –Liquidity risk is the most prominent risk associated with unlisted REITs, as investors may not be able to exit a REIT easily like selling shares on a public market. The primary way out of a REIT is via its liquidity event, which will be set out in the terms and conditions and is typically five or more years. Some REITs will also set aside a certain percentage of a fund’s assets to facilitate quarterly withdrawal requests, and investor withdrawal requests are processed on a best endeavour basis. During Covid for example, some REITs in Australia had difficulties meeting withdrawal requests as many business tenants experienced hardships which negatively impacted REITs cash flow and valuations.

 

 Listed REITs – more than just increased liquidity 

 

In Australia, listed REITs on an exchange like the ASX are also known as A-REITs. Many A-REITs, including larger ones such as Goodman Group (GMG), Scentre Group (SCG) and Stockland (SGP) are stapled REITs, meaning the unit of the trust and the shares of trust management business are trading together.

This structure essentially allows investors to be not only the unitholder of the trust but also the shareholder of the trustee company. Investors get the benefit of both passive income from trust ownership and active income from fund management. The two income streams are taxed separately. A-REITs would normally have more flexible options and structures when conducting capital raising as opposed to unlisted options, including issuing corporate debt.

 

Important Information

The information contained in this article is gathered from multiple sources believed to be reliable as at November 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. Past performance is not necessarily indicative of future results. No warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither NAB or any of its related entities accept liability to any person for loss or damage arising from the use of this information. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB does not guarantee the accuracy or reliability of any information in this article which is stated or provided by a third party. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. You may be exposed to investment risk, including loss of income and principal invested.

You should consider the relevant Product Disclosure Statement (PDS), Information Memorandum (IM) or other disclosure document and Financial Services Guide (available on request) before deciding whether to acquire, or to continue to hold, any of our products.

All information in this article is intended to be accessed by the following persons ‘Wholesale Clients’ as defined by the Corporations Act. This article should not be construed as a recommendation to acquire or dispose of any investments.

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