REITs, or Real Estate Investment Trusts, are companies that own, operate, or finance income-generating real estate. They are designed to give individual investors the opportunity to invest in a diversified portfolio of real estate and make it possible for such investors to earn dividends from real estate investment assets without having to go out and buy, manage or finance property themselves. This is done by pooling capital from multiple investors to invest in such a portfolio. The portfolio may include office buildings, apartments, shopping malls, resorts, hotels, self-storage facilities, warehouses, and mortgages or loans. Most REITs focus on a particular type of property, but some hold multiple types of properties in their portfolios.
REITs may be traded on major stock exchanges, allowing investors to buy and sell shares like any other publicly traded stock.
The Ghanaian REIT Market
To qualify as a REIT, a company must comply with certain provisions or regulations.
In Ghana, REITs are required to meet certain standards set by the Securities and Exchange Commission (SEC) in the Securities Industry (REITS) Guidelines 2019, including:
- the company shall be engaged in the business of investing in income generating real estate;
- at least 75% of its revenue shall derive from rents, mortgage interest and investment income from indirect property ownership;
- at least 75% of its total assets shall comprise of real estate;
- at least 80% of its distributable profit, for each accounting period, shall be distributed to shareholders;
- the company shall list on an exchange within three (3) years as a REIT;
- its leverage ratio does not exceed 40% of gross asset value; and
- it shall not invest more than 40% in a single property.
Main Types of REITs
- Equity REITs:
These are the most common type of REITs and primarily invest in and own income-generating real estate properties such as residential buildings, commercial office buildings, retail centers, and others. Income is generated through rents from tenants, with a significant proportion distributed to shareholders. The value of equity REITs is largely driven by the performance and valuation of the underlying real estate properties.
- Mortgage REITs:
Also known as mREITs, these focus on investing in real estate mortgages or mortgage-backed securities. They provide financing for real estate by originating or purchasing mortgage loans. They generate income primarily through the interest that is earned on these mortgage investments.
- Developmental REITs:
These REITs may specifically target properties or projects that are in the development or construction phase, with the goal of generating returns through the completion and subsequent leasing or sale of the developed properties.
The Advantages with investing in REITs
The below are why investing in REITs could be to your advantage.
Gain Exposure to Real Estate
Investing in real estate typically requires a significant amount of capital and expertise in property management. A major reason to invest in REITs is the exposure they provide to real estate without you directly purchasing individual properties. Thus, there is the opportunity for individual investors or smaller institutions to invest in real estate without the significant financial commitment for due diligence or the particular risks that come along with investment in individual properties.
Earn High Profits
To qualify as a REIT, particularly in Ghana, companies are required to pay out at least 80% of their taxable income to shareholders as distributable profits. That makes REITs a good source of dividends. All things being equal, these profits may be relatively high as compared to other financial market instruments.
Investors can also benefit from potential capital appreciation of the underlying real estate properties held by the REIT. If the value of the properties held by the REIT increases over time, the value of the shares can also appreciate.
Portfolio Diversification
REITs offer a distinctive risk/reward profile that doesn’t always perfectly correlate with stocks or bonds. Since they are not directly tied to traditional markets, REITs can bolster your portfolio when markets take a nose-dive. This diversification can also help reduce risk because performance variations among individual properties or sectors are spread out.
The major risks in investing in REITs
The property location, quality, tenant mix, lease terms, and market conditions can impact rental income and property values. If the properties are in underperforming markets, experiences high tenant turnover, has poor facility management, it may affect the overall performance of your investment.
REITs are directly influenced by the performance of the real estate market. Changes in real estate supply and demand, economic conditions, and interest rates can impact property values, rental income, and occupancy rates. A downturn in the real estate market can negatively affect the performance of REITs.
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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.
This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.
