REIT ETFs Offer an Alternative Investment Option
REIT ETFs offer one of the alternative investment options for investors seeking exposure to commercial real estate. REIT ETFs take exposure mainly into REIT stocks.
REITs were introduced in the US in 1960. For the next 30 years, REITs were largely confined to the US and Australia. Brazil introduced REITs in 1993.
The most common way of calculating the relative value of a REIT is the price-to-FFO multiple. FFO is widely used because it’s the main earnings metric for REITs.
The capitalization rate, or cap rate, is an important concept in the commercial real estate industry. It’s defined as an initial yield on a real estate investment.
Traditional valuation methods don’t apply to REITs because their operations are different from traditional companies. REITs are valued based on three main techniques.
REITs are introduced to provide investors with long-term rates of return that are competitive with other asset classes like bonds and equities.
The dividend yield is calculated as an annual dividend divided by the share price. REIT dividend yields can be compared to the yields of other asset classes.
Economic growth is the major factor that determines REITs’ growth. An uptick in economic fundamentals positively affects the REITs by increasing business growth.
A data center requires a lot of power to run its operations. As a result, data center REITs rent their space to tenants mainly based on power capacity usage.
Self-storage REITs own and operate self-storage facilities like rooms, lockers, containers, and outdoor space. Tenants include businesses and individuals.
Shopping center REITs mainly own and operate shopping centers that are smaller than retail malls. They’re mainly driven by higher consumer spending.
Consumer spending is the main driver of retail REITs. Weak consumer demand can lead to higher vacancy and lower leases.
Lodging, resort, and hotel REITs primarily own but don’t operate hotel and resort properties. Lodging REITs consist of hotel properties with a number of brands.
Office REITs own and operate office properties. Office properties are further divided into two types—CBD (central business district) and suburban.
Industrial REITs mainly include assets like warehousing facilities, distribution centers, manufacturing facilities, R&D centers, and administrative functions.
Healthcare REITs own healthcare properties like senior housing communities, skilled nursing facilities, hospitals, and medical office buildings.
The residential REIT sector mainly includes apartments and manufactured housing. It’s one of the largest segments in the REIT industry.
Equity REITs dominate the REIT market. They account for almost 90% of the total market capitalization of all the REITs. They include specialized REITs.
There are three types of REITs—equity REITs, mortgage REITs, and hybrid REITs. Mortgage REITs lend money to landlords and their operators to purchase a property.
Every investment comes with certain advantages and disadvantages. REITs are no exception. There are benefits and risks associated with investing in REITs.
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