Real Estate Investment Trust (in short REIT) is considered as relatively safe investment compared to other investment instruments; however, like any other investment option, REITs also come with certain risks that one should consider before making any heavy investments.
In this article, we’ll see what are the risks associated with REITs.
Reasons why REITs may not be completely safe.
Note: Please don’t think that REITs are just another risky investment as this article focuses on potential risks only and not on advantages. So do your own analysis and research before doing investments.
1. Economic risk:
REITs get influenced by market conditions, and their prices can fluctuate based on factors such as interest rates, economic conditions, and real estate market trends. During periods of economic downturn or market instability, REITs may experience a decline in value.
Even tough REITs are meant to be hold as real estate (long term), but it is liquid in nature that cause so much selling in economic crisis causing it to decline in value during during that time.
2. Demand due to higher interest rate:
REITs rely on debt to finance their real estate holdings. When interest rates rise, it can increase the cost of borrowing for REITs and potentially impact their profitability.
On the other side, higher interest rates can also make other fixed-income investments much more lucrative, potentially reducing investor demand for REITs.
For instance, in India after lock, banks were offering higher interest rates on Fixed Deposit (FD) like 7.5~8% which is slightly higher than REITs so it is easy for investors to move in FDs.
3. Real estate market risk:
REITs depend on the value of the real estate asset. A decline in the real estate market, such as declining property values or reduced rental income, can negatively affect the revenue generated by REITs. For instance, the Corona virus lock down or the Lehman Brother’s collapse.
4. Liquidity risk:
Although REITs are traded on stock exchanges, their liquidity can vary. Some REITs may have lower trading volumes and wider bid-to-ask spreads, making it more difficult to buy or sell shares quickly without impacting the market price.
5. Management risk:
The performance of a REIT is influenced by its management and leadership team. Poor management decisions can negatively impact the financial health and returns of the REIT. So do thorough research on the company and its management before investing.
6. Regulatory and legal risks:
REITs are subject to regulatory requirements and must adhere to certain guidelines to maintain their tax-advantaged status. Although regulators won’t be damaging this investment option. But changes in tax laws or regulations can severely affect the profitability and operations of REITs.
Is REIT safer than stocks?
Yes, it is, but do not expect any compounding returns from it (just like we do on equity stocks). It just offers rental income which is distributed amongst the shareholders. The best part is you’ll always receive rental income in the form of dividends even when market is up or down.
It can give you about 8~12% returns in its best time, and 4~8% on an average when things are doing just okay. Based on decent economic outlook capital appreciation is possible that could give a better returns in long run. So, technically it is safer than stocks.
How many REITs are listed in India?
You can diversify your REIT investments also by investing in different-different REITs. At this moment in India we have following REITs to make you positions on:
- Embassy Office Parks REIT Ltd (NSE:EMBASSY-RR).
- Mindspace Business Parks REIT Ltd (NSE:MINDSPACE-RR).
- Brookfield India Real Estate Trust Ltd (NSE:BIRET-RR).
- Nexus Select Trust Ltd (NSE:NXST-RR).
Disclaimer: I’m not a SEBI registered advisor to make any recommendations, they are just available options right now in Indian market. So please, do your own research for investments.