Advice and Opinion

The difference between investing in a REIT and in direct property

Property Market / Investment

The wonders of the property market as an asset class has encouraged you to make a commitment to go into it.

Buying property directly is the most obvious way but what if you do not have enough for the deposit? What if a fancy office building has caught your eye but the purchase price is making you feel nauseous and not to mention the laborious management and maintenance that you will have to find the time to do.

Would this mean that you would have to give up on your dream of being a property investor?

Not so says Wealth Migrate. There are other ways for you to realize your dream.

Real Estate Investment Trusts (REITs) are one of the ways in which you could make your entrance into the world of real estate.

Essentially, REITs are specialized mutual funds that are focused on property. They are securities traded on stock exchanges such as the Johannesburg Stock Exchange (JSE), the Australian Securities Exchange (ASX) and the New York Stock Exchange (NYSE) which makes them liquid.  However, the liquidity has a downside; REITs are at the mercy of market sentiment.

With REITs it is hard to know exactly what you are investing in; you effectively own a share of the total fund, not the underlying property. Established REITs can be hard to unpack in terms of locations and risk factors.

If you are unsure of the make up of a REIT, it is hard to work on creating a diversified portfolio. The REIT(s) 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 come with costs too. Their fee structure is usually based on assets under management and it 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 you are a hands-on investor, REITs may leave you feeling frustrated. A more collaborative approach may be what you are after.

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”.