You’ve heard about the wonders of property as an asset class and you have made a commitment to get into it.
The most obvious way to enter the market is to buy property directly – as in when you buy a home, the whole building as well as the garden belongs to you (well, it will do in 20 years’ time when you have paid off the bond).
But what if you don’t have enough for the deposit or a fancy office building has caught your eye but the price tag makes you feel a little nauseous, not to mention the laborious management and maintenance that you will have to find time for. Does this mean that you will have to give up on your dreams of being a property investor?
No, it does not; there are other ways to realise you dream. Real estate investment trusts (REITs), for example, are a way to enter the world of real estate if you do not have the bank balance needed for direct ownership.
REITs are essentially specialised mutual funds that are focused on property. They are securities traded on stock exchanges such as the JSE, Australian Securities Exchange (ASX) and New York Stock Exchange (NYSE), and this makes them fairly liquid. This liquidity has a downside, however, as the REITs are at the mercy of market sentiment.
If you were to have the money to buy the shiny office block within walking distance of the row of hipster shops you have had your eye on, you would do some serious research before buying it.
With REITs, however, it is hard to know exactly you are investing in. You effectively own a share of the total fund, not the underlying property, not even a piece of it.
Getting back to the office block you are dreaming of buying, you would not sign any document before you had done a thorough risk assessment, but established REITs can be hard to unpack in terms of locations and risk factors. If you are not sure of the make-up of a REIT, it is hard to work on creating a diversified portfolio. The REITs you choose may all be invested in the same dodgy swampland.
The management of buildings can be costly – in terms of time and money – but REITs also come with costs. The fee structure is usually based on assets under management (AUM) and is often not aligned to investors’ long-term interests. They have large overheads and numerous middlemen involved in selling and marketing, which can dilute investors’ returns.
If your plan was to be a hands-on investor, then REITs may leave you feeling frustrated. A more collaborative approach may be what you are after. Investment companies are proponents of educating investors to ensure that everyone is in a position to make more informed decisions.
Investing in property will always be a step in the right direction – almost half of the world’s wealth is held in real estate – and there is a good reason for the expression ‘He who owns the land is king’.