What is listed property investment?

What is listed property?

Is this type of property investment right for you?

For good reason, property investment remains a favourite type of investment for many Kiwis. Listed property commonly refers to a type of property investment that could be a welcome addition to the investment portfolio of many New Zealanders.

Background – REITs and listed property

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. A REIT is a type of managed fund, as REITs pool the funds of numerous investors.

In NZ, the term listed property commonly refers to REITs listed on the NZ sharemarket. That means everyone can buy a little piece of them and own a slice of the real estate that those companies hold. Listed REITs are professionally managed, publicly traded companies that manage their businesses with the goal of maximising shareholder value.

Note: to avoid confusion, in some countries the term ‘listed property’ can refer to a certain type of business asset for tax purposes. That is not the focus of the description on this page.

Traditional Kiwi property investors

When most Kiwi’s think of a property investment, we might think of a “mum and dad” investor buying a residential property or two. This might be as a house or unit, or perhaps a block of flats or apartment. This type of investment has been a Kiwi favourite for many years, as directly investing in property offers many advantages, including:

  • Improvements can be made to increase the property’s value. This especially suits DIY’ers and tradespeople.
  • The landlord can directly control the property.
  • Unlike most investments, property can be leveraged for maximum return. This means borrowing to invest, including ‘unlocking’ the unused equity in a family home. This can markedly increase the potential return on investment.
  • For many people, it feels good to see and touch a physical investment – as opposed to owning shares in a company traded on the stock exchange which may not feel as “real”.
  • Rental income.
  • Favourable tax rules – though these have been degraded in NZ over recent years.

Of course, all investments have disadvantages too. When directly investing in residential property, disadvantages can be:

  • A large initial sum is usually required.
  • Lack of diversification.
  • It can be hard and costly to sell.
  • Tenancy trouble.
  • Time to find investments and manage them, or the cost to pay someone to do this.
  • Unforeseen costs, perhaps due to maintenance or at worst, an earthquake or other disaster.
  • Leverage increases the risk more than most people might realise. If it really comes down to it, the bank can sell the property for less than the sum owing on the mortgage, then come after the property owner for the shortfall.
  • Over recent years, tax changes, tenancy law changes which firmly favour tenants, and several other laws and regulations have made life as a landlord more challenging.

For those in a strong financial position, traditional property investment (as described above), might currently be even more appealing right now due to the low interest rates currently on offer. That said, listed property can be a great investment too, and can offset some of the disadvantages above.

How is listed property different?

In NZ, the REITs available invest almost entirely in commercial property, such as:

  • Industrial – distribution hubs, factories and warehouses
  • Offices – buildings that house corporate and government offices
  • Retail – shopping malls and large format retail stores

Most REITs focus on a particular type of commercial property, though some hold multiple types of properties in their portfolios.

Listed property has advantages and disadvantages too

Listed property offers investors several advantages:

  • The ability to own real estate and earn dividend income from real estate investments without having to directly buy or finance any property purchases themselves.
  • Diversification.
  • The ability to own real estate that might usually be out of an investors reach: such as offices or industrial buildings.
  • The market instantly reflects any increase in share value.
  • Professional management.
  • Affordability – there’s usually no minimum investment.
  • Ease of buying and selling.
  • Tax efficiency.
  • Rental income paid as dividends.

Listed property has disadvantages too, including:

  • Usual property risks. The REIT itself must manage risks including those regarding leverage, the possibility of natural disasters impacting the properties, and so on.
  • Investors give control of operational decisions to the REIT.
  • Some REITs have high management and transaction fees, leading to lower payouts for investors.
  • The share price can be heavily influenced by market conditions, which may not be a reflection of the actual value of the underlying properties. This can unsettle some investors.
  • The extra regulatory expenses to ensure the REIT complies with regulations and laws regarding publicly traded companies.

How have listed property REITs performed in the past?

Very well. Over the 10 years to 30 September 2020, the most commonly used NZ listed property index returned a stunning total average return of 12.51% every year. That’s a 225% return across a 10-year timeline during which significant events have occurred, including the Christchurch earthquakes and impacts of Covid-19.

The return REITs generate is split between:

  • Capital gains, and
  • Tenants paying rent. Most often, a portion of this is paid regularly as a dividend.
What is a REIT - listed property investment

Tips for investing in listed property

If you’re considering making the leap to invest in listed property, here are a few tips to consider before you get started:

  1. Understand the types of properties you are investing in. Most REITs specialise in a certain sector which should be easy to find in the fund summary. Understand the risks of each sector. More than ever, the current environment highlights the need to be selective when investing in listed property securities. This is because different sectors of the real estate market have been impacted to different degrees as Covid-19 lockdown and containment efforts have occurred. Some tenants have sought and obtained rent relief, while other sectors are more in demand than ever e.g.: supermarkets, healthcare, logistics and Government agencies. These tenant types continue to occupy buildings regardless of the lockdown level.
  2. Are there opportunities? The current economic downturn may have caused some REIT investors to panic and sell- causing a fall in REIT price on the stock exchange. This can create opportunities for wise long-term investors.
  3. Look at the numbers. It is important to see if dividends are being paid from operations or if the fund is being forced to use additional capital. A well-run REIT should rely on its operations to pay for expenses and dividends. Also, be wary of large, one-time real estate sales that might skew the financials upwards. Some financials are being revised due to Covid-19, as the values of properties are re-evaluated and higher vacancy rates are factored-in to rental forecasts.
  4. Know your investor risk profile and time horizon. Investing is usually a long-term game, and listed property is no different. The ‘usual’ tips regarding diversification and not taking any more risk than you can handle apply here too.

How can you invest in listed property?

Chances are you already own some listed property as part of your existing investments, perhaps with KiwiSaver – most fund choices dedicate a small fraction to property such as NZ-based REITs. In addition, you can also:

  • Buy shares in a REIT company – there are eight major REITs listed on the NZ sharemarket, and they probably own properties that you visit on a regular basis! You can buy them just like any other public stock on the NZ market, and/or
  • Invest in a property-focused managed fund, active and passive funds are now available in tax-efficient NZ-based arrangements, and/or
  • Separately, international REITs can be a great diversifier. A huge number are available across the globe, investing in array of property and infrastructure assets to suit any investor. All ten of the largest REITs are based in the United States.

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