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Investors are always looking for the best investment plans which can help them enhance their portfolio and grow their wealth. REITs provide various benefits to investors that include liquidity, transparency, higher dividend yields, and simple tax treatment.

Key among the benefits is diversification since real estate prices are not correlated to stock prices. The addition of REITs can help form a diversified portfolio.

In Kenya REITs are required to pay at least 80% of their taxable income to shareholders as dividends annually. This makes REITs an attractive asset class for income-seeking investors.

When investing in a REIT it is important to understand the qualitative aspects of a REIT, its growth drivers, quality of its REIT manager and sponsor, and investment risks.

Other factors to consider include:

Liquidity

1. Some REITs are large with many investors while others are smaller.
2. Since REITs are required to be listed on the NSE, investors may suffer risks of liquidity when trading REIT units.

• The price of REIT units depends on the market conditions as well as the demand of buyers and sellers.

1. There may be many influential factors such as economic conditions, politics, trends of real estate business, and predicted future operating results of the REIT.

Industry Type

1. REITs fall into six broad categories; office, retail, residential, healthcare, hospitality, and industrial.
2. Each sector has its own specific characteristics that will affect a REIT’s growth, risk profile, and performance.

• Office REITs own office buildings. The economic cycle largely affects the performance of an office REITs.

1. During economic boom, businesses do well and demand for office space is high translating to higher rents and property income for the REIT.
2. The opposite occurs during a recession whereby some businesses close down, demand tumbles and office rents fall in tandem.
3. On the other hand, retail REITs own shopping malls. Even in times of recession, many malls are usually still packed with shoppers and shop spaces are fully let.

• Demand for retail space remains high which means rents and property income for the REIT barely drop.

Dividend Yield

1. While everyone enjoys a high dividend yield, what’s more important is to examine a REIT’s dividend track record.
2. This includes whether a REIT pays a stable or rising dividend per share (or distributions per unit) year after year or if it fluctuates every year.

• A REIT that is able to steadily grow its income and dividend per share year after year is understandably a more attractive investment than a REIT whose dividend payouts fluctuate all the time.

1. A REIT with a higher dividend yield does not necessarily mean that it is a “better” investment.
2. For example, an office REIT usually has higher yields compared to a retail REIT, but office REITs are also more volatile and less resilient than retail REITs.

Property yield

1. Property yield is the amount of income a REIT can generate from a property.
2. The higher the yield, the better but it is important to examine whether a REIT’s property yield is stable or rising over the years.

• A well-managed REIT will look for ways to continually improve its property yield.

1. One common way for a REIT to improve its property yield is to acquire yield-accretive properties.
2. For example, if a REIT’s property yield is 4% and it acquires a new property that generates a 5% yield, the new acquisition will help to increase the REIT’s overall property yield.

Gearing ratio

1. Gearing ratio represents a REIT’s amount of debt over its total assets.
2. The higher the ratio, the more debt a REIT has while the lower the ratio the more conservative a REIT is.

• A REIT can borrow the money to fund new acquisitions for growth and upgrade its buildings.

1. A high gearing ratio means that a REIT is willing to take on more debt and risk for growth.

P/B ratio

1. P/B ratio measures a REIT’s share price against its net asset value (NAV) per share.
2. Theoretically, a P/B ratio of 1 indicates a fair valuation, a ratio above 1 means a REIT is overvalued while a ratio below 1 means it is undervalued.