Risks Associated With REITs
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.
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.
Continue to read risks associated with publicly-traded REITs and risks associated with private REITs.
