Retail REITs

Published on :

21 Aug, 2024

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Retail REITs refer to real estate investment trusts that own, control, develop, and acquire retail properties located in upmarket areas and central business districts. Individuals can earn dividends and benefit from moderate or long-term capital appreciation by investing in such a REIT.

Retail REIT companies make financial gains by leasing retail space to tenants trying to set up boutiques, shopping malls, grocery stores, etc. These REITs also buy struggling retail properties, for example, shopping malls aiming to improve them and entice tenants who can fulfill the rental obligations. Such REITs are of two types — freestanding and retail.

What Are Retail REITs?

Retail REITs are organizations that manage, own, develop, and purchase retail properties and lease the space available in them to tenants looking to establish grocery stores, outlet centers, etc.
Shopping mall and freestanding are the two retail real estate investment property types.
Individuals have the opportunity to earn significant returns in the long term by investing in the best retail REITs, as the value of retail real estate properties can rise with time.
One must note that investing in such REITs is associated with interest rate and recession risk.

Retail REITs Explained

Retail REITs are companies that own and control retail estate properties and rent out the space available in them to tenants having the capacity to pay rent at fixed intervals, for example, quarterly, annually, or monthly. Individuals can invest in them to stabilize their investment portfolio and achieve their financial goals.

Various large institutional investors, for example, foundations, endowments, insurers, and pension funds, invest in such companies to gain cost-efficient exposure to real estate. Also, many U.S. citizens are often unaware that they have already made retail REIT investments through their TSP or Thrift Savings Plan, 401k, etc.

The business model of such real estate investment trusts focuses on managing, owning, taking over, and developing. These companies can control and establish the property via a team comprising real estate managers with vast experience and then generate revenue using it.

Sometimes these REITs may enter into an agreement with real estate companies to manage the latter’s portfolio comprising retail properties. The former will have to get new tenants and collect rent on the owner’s behalf. For doing this, the REITs get a percentage of the rent.

These REITs distribute the rent collected from owned properties, commissions earned for managing other properties, and the profits generated from selling the retail properties to their investors. Per law, REITs must distribute most of the net annuals to shareholders as dividends. Moreover, they must generate three-quarters of their returns from activities related to real estate, for example, the sale of properties and rent.

One must note that if these REITs fail to adhere to the laws of the U.S. Congress, they will lose some of the advantages offered to them, for example, the exemption received from federal-level and corporate taxes.

Video Explanation REITs or Real Estate Investments Trusts

Types

The two types of these REITs are as follows:

#1 - Freestanding Retail Real Estate Investment Trust

Also referred to as net lease REITs, it gives long-term rental space to tenants offering services and products required regularly, for example, fitness centers, theaters, pharmacies, and restaurants. Generally, such tenants ensure stability stable; they rent it for a long duration.

The contract signed between tenants and the REITs needs the former to pay rent monthly in addition to other expenses, such as taxes, maintenance costs, and insurance. These tenants typically have a strong foothold in the industry. Hence, the likelihood of them not paying rent on time is extremely low.

Moreover, since the tenants cover the majority of the REITs’ operating expenses, the latter can be safeguarded from a rise in such expenses. This is why they have predictable cash flows and are an appealing investment option for individuals seeking consistent, high returns because of their nature.

#2 - Shopping Mall Retail Real Estate Investment Trust

These REITs are a suitable investment option for individuals seeking higher-than-average dividend payments and strong returns. With the retail industry evolving, such REITs offer significant growth potential. The malls have a tendency to rent out their space for a long duration and increase rent at fixed intervals. This assures that the REIT generates revenue consistently over the years.

Moreover, one must remember that malls can accommodate a large number of tenants simultaneously. Thus, if a couple of tenants decide to shift location, it will only have a small impact on income. Moreover, malls can get new tenants quickly due to the high demand for space. Besides rental income, a mall also generates income from other services, such as offering space for conferences, parking, and more.

How To Invest?

Individuals can invest in the best retail REITs directly with the assistance of a broker. Alternatively, they may purchase units or shares of REIT exchange-traded funds (ETFs) or REIT mutual funds.

That said, before parting with their funds, one must consider conducting an industry assessment and evaluating the REIT to determine whether the company has an impressive balance sheet and profits. Moreover, individuals must also check the debt of the REITs before allocating their funds. Typically, the lower the debt, the better for investors.

Examples

Let us look at a few retail REIT examples to understand the concept better.

Example #1

Suppose David was an investor building a portfolio to achieve his long-term financial goals. He notices that his portfolio primarily comprises aggressive stocks. So, David decided to invest in retail REITs to mitigate risk through diversification and earn regular income via dividend payments.

So, he contacted a broker, ABC Company, and purchased shares of two REIT companies. He earned regular dividends and significant returns from the REIT investment over 10 years. The returns generated by the REITs and the capital gains earned from the stocks helped him achieve his financial goals.

Example #2

Nexus Select Trust, a retail REIT backed by Blackstone, will open for subscription in India on May 9, 2023. The price band is fixed at ₹95 to ₹100 per unit. The public issue consists of a fresh issuance worth ₹1,400 crores and an OFS or offer for sale of ₹1,800 crores. Nexus Select Trust will utilize the net proceeds for the repayment of date, redemption of debt instruments in specific SPV or special purpose vehicles, and acquisition of the stake. Moreover, the company will utilize the funds to fulfill general corporate purposes.

Advantages And Disadvantages

Let us look at the benefits and limitations of such REITs.

Advantages

Lease Structure: Generally, freestanding retail real estate investment trusts have long-term rent agreements with tenants that are well-established businesses. Hence, they have cash flow stability, which makes them an option worth considering for individuals seeking portfolio stability.
High Dividends: The best retail REIT companies offer better-than-average dividend payments to their shareholders.
Anchor Tenants: Another key benefit of such REITs is the anchor tenants. Such tenants have long-term tenants with the REIT.
Capital Appreciation: Such REITs can provide investors with moderate to high returns over the long term.

Disadvantages

Recession Risk: A large number of tenants sell discretionary products. During a recession, the demand for such offerings falls. This impacts the seller’s ability to pay rent on time.
Disruption By E-commerce: With time, consumers are engaging more in online shopping. This is impacting the sales of brick-and-mortar sellers.
Interest Rate Risk: REITs tend to borrow massive funds to purchase and develop properties. When interest rates increase in an economy, the cost of borrowing surges. Meanwhile, the increasing interest rates raise the income yield on low-risk investments, for example, bonds. The price of REIT shares often drops if the interest rates rise. As a result, the companies have to offer higher dividend payments to compensate investors for a higher risk profile.

Frequently Asked Questions (FAQs)

1. Can retail investors invest in retail REITs?

Retail investors can allocate funds to these real estate investment trusts to earn capital gains and dividends. Such REITs provide individuals with exposure to large-scale, income-generating retail real estate. That said, people must consider vital aspects such as their risk appetite, financial goals, and the REIT’s financials before investing.

2. What affects retail REIT share price?

Multiple factors may influence the share price of such REITs. That said, two significant factors are the interest rate in the economy and recession.

3. How do you calculate return on retail REITs?

Individuals can compute the return on such a real estate investment trust by using this formula:
ROREIT = AR / I * 100
Where:
- ‘ROREIT’ is the percentage return on REIT.
- ‘AR’ is the yearly or annual return.
- ‘I’ is the overall amount of REIT investment.

4. What is the difference between real estate and retail REIT?

Direct investment in real estate has more tax breaks than retail REITs. Moreover, it offers investors more control regarding decision-making. Another key difference is that retail REIT investments allow individuals to invest in the real estate space without owning or managing the physical properties, unlike direct real estate investment.