Property prices have historically moved higher, and have therefore been a profitable place to invest for many people. However, there are numerous difficulties associated with buying property directly that make the process riskier and more challenging than purchasing real estate investment trusts (REITs).
Additionally, REITs could offer better value for money than direct property at the present time. This could provide investors with a superior risk/reward opportunity, which may mean that now is the right time to add REITs to your portfolio.
Obtaining a diverse range of properties is a costly process. Even if you borrow the majority of the purchase price for each property, you are still likely to require a large amount of capital to build a diverse property portfolio. For many people, this will be unobtainable. As such, they may end up with a concentrated portfolio that is made up of a small number of properties. Should there be issues with one property, such as repairs or an extended void period, this could lead to a significant reduction in their return potential.
By contrast, diversifying among REITs is relatively simple. A REIT offers exposure to a large number of properties in many cases, with them often occupying different locations and types of usage. For example, a REIT may have a number of retail, office and leisure units within its asset base. This helps to reduce overall risk. Furthermore, buying a handful of REITs is a simple process that, due to the emergence of online sharedealing, has become much cheaper over recent years.
It may be possible to generate higher returns from REITs than from direct property investment. Global share prices could include a margin of safety at the present time, with investors demanding lower valuations due to ongoing risks to the world economy’s outlook. This may mean that some REITs trade at discounts to their net asset value and offer high yields. This may mean there is scope for a high total return in the long run.
Since REITs are professionally managed, they may be able to identify potential growth areas early and more accurately than private investors. For example, they may be able to focus their capital on areas such as flexible office space, which has become increasingly popular over recent years in many countries. Such opportunities may not be available on the same scale to an investor who buys property directly.
Buying REITs could improve the returns of your portfolio, as well as reduce your overall risks. As such, with many companies within the sector currently trading on low valuations, now could be the right time to buy a range of REITs for the long term. They could provide simplicity, catalyse your wider portfolio and increase your prospects of retiring early when compared to buying a small number of properties directly.
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Motley Fool UK 2019