Industry Views

Exploring New Investment Opportunities with Small and Medium Real Estate Investment Trusts (REITs)

May 22, 2024
4 mins read
Investment Opportunities in SM REITS

According to a Jefferies report, as of February 2024, 66% of Indian households had invested in real estate and gold. This clearly demonstrates the preference among Indians for physical assets such as real estate.

The world of real estate investment trust (REIT) is undergoing a fascinating shift. While large-cap REITs have long been a staple for investors seeking stable returns, the emergence of small and medium REITs (SM REITs) is shaking things up. This new asset class offers exciting possibilities for both individual investors and the real estate market as a whole.

Democratizing Real Estate Investment

Traditionally, investing in income-producing real estate has been the domain of high-net-worth individuals and institutions. Owning a shopping mall or a sprawling office complex simply wasn't feasible for the average investor. REITs changed that by pooling investor capital to acquire and manage real estate portfolios. However, many traditional REITs focus on large, well-established properties, often limiting accessibility for smaller investors.

Here’s where SM REITs bridge this gap. By targeting smaller, niche properties, reit investing allows investors to participate in the real estate market with lower investment amounts. This opens doors for a wider range of individuals to benefit from the potential for steady rental income and capital appreciation offered by real estate.

Beyond the Usual Suspects

SM REITs typically invest in a wider variety of property types compared to their large-cap counterparts. While office buildings and shopping malls remain possibilities, SM REITs might also focus on:

  • Warehouses and logistics centres: The rise of e-commerce has fuelled demand for efficient storage and distribution facilities.
  • Healthcare facilities: An ageing population creates a growing need for senior housing, medical offices, and other healthcare-related properties.
  • Hotels: SM REITs could target specific hotel categories, such as select service or extended-stay hotels.

This diversification offers investors exposure to potentially high-growth sectors within the real estate market. SM REITs essentially open up the possibility for them to diversify their portfolios by investing in multiple such sectors of real estate property while traditional office spaces and retail properties remain safe options.

Benefits of SM REITs

So, why should you consider including SM REITs in your investment portfolio? Here are some compelling reasons:

  • High Yield Potential: SM REITs may offer higher dividend yields compared to larger REITs. This is because they often have a greater focus on acquiring properties with strong rental income streams.
  • Growth Potential: SM REITs might target emerging property sectors with higher growth prospects. This could lead to capital appreciation alongside the income generated by the underlying assets.
  • Liquidity: SM REITs are typically listed on the stock market, providing investors with greater liquidity compared to directly owning real estate.
  • Professional Management: Like traditional REITs, SM REITs are managed by experienced professionals who handle property acquisition, tenant relations, and overall portfolio management.

Investing in SM REITs: Measures to Take

While SM REITs offer an exciting investment opportunity, it's crucial to approach them with a cautious eye. Here are some factors to consider:

  • Higher Volatility: SM REITs are generally smaller and less established than large-cap REITs. This can translate to higher volatility in their share prices.
  • Limited Track Record: The SM REIT market is still relatively new. This means there might be less historical data available to assess past performance and future prospects.
  • Liquidity Concerns: While generally more liquid than direct real estate ownership, SM REITs might have lower trading volumes compared to large-cap REITs. This could make it slightly more challenging to enter or exit positions quickly.

Finding the Best SM REIT Investments

Before diving into SM REITs for an effective income producing real estate investment option, conduct thorough research. Here are some tips:

  • Understand the underlying assets: Analyse the types of real estate assets the SM REIT invests in and assess the long-term viability of those sectors.
  • Evaluate the management team: Research the experience and track record of the team managing the SM REIT.
  • Consider the dividend yield and payout ratio: Look for a balance between a high enough yield and a sustainable payout ratio.
  • Compare fees: Be mindful of the management fees and other expenses associated with the SM REIT.

Parting Thoughts

The rise of SM REITs presents a unique opportunity for investors to tap into the real estate market with potentially higher yields, diversification benefits, and exposure to emerging sectors. However, REIT clients must conduct careful due diligence which is essential before real estate investing. By understanding the risks and rewards, investors can make informed decisions about whether SM REITs are a good fit for their investment goals. Remember, the best REIT investments for you will depend on your risk tolerance and overall portfolio strategy.

To learn more about investing in real estate effectively and understanding SM REITs investments better, contact us at Strata!

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