What are A-REITs? Australian Real Estate Investment Trusts or A-REITS for short, are companies that own income producing real estate assets. It’s mostly commercial rather than residential property. A-REITs provide investors with a regular income stream, whilst also giving capital growth and diversification benefits. A-REITs usually pay out all of their taxable income as dividends to shareholders. This is generally at least 90% of its income paid to investors. This makes them an attractive investment. However dividends usually don’t provide franking credits as they are taxed at the investor level due to the trust structure. Shareholders pay income taxes on those dividends. A-REITS give investors the opportunity to invest in large commercial properties that would otherwise be out of reach. These assets allow investors to earn a share of income generated by tenants on the property without having to buy the physical property themselves. A-REITs generate wealth through capital growth and rental income. The fund manager is responsible for administration, maintenance and rental issues. Each A-REIT has its own features, type of properties, lease lengths and tenants. A-REITs are traded on the ASX but there are public non-listed and private A-REITs. Mortgage REITs invest in mortgage securities tied to commercial or residential properties. These are riskier. 90% of A-REITs are Equity whilst the remaining 10% are Mortgage. The underlying assets that an A-REIT can be tied to, can vary depending on the fund manager. Here is a list of properties that an A-REIT can hold. The ASX has listed A-REITS in these categories: The underlying assets that an A-REIT can be tied to can vary depending on the fund manager. Here is a list of properties that an A-REIT can hold. The ASX has listed A-REITS in these categories: Office trusts include medium to large office buildings in and around major cities. Industrial trusts invest in warehouses, factories, and industrial parks. Hotel and leisure trusts invest in hotels, cinemas and theme parks. Retail trusts invest in shopping centres and similar assets. Diversified trusts invest in a mixture of industrial, offices, hotels and retail property. Residential trust usually invested in residential property developments – Stockland Group, Lend Lease and Mirvac. Some A-REITs give diversified exposure such as GPT Group (GPT) which is tied to industrial, office and retail. What moves A-REITS? The main characteristic of A-REITS is the income and capital growth, but more-so the income. Whether it’s a commercial or residential A-REIT, both generate the majority of their income from rent. If a large tenant vacates the commercial property, the rental income received will fall, lowering returns on the fund. This can be bad news for the fund if it is highly geared and fails to meet its interest obligations. That would move the share price south. The main priority for a REIT is that it has to be able to generate sustainable cash flow through the leasing of its assets. That means that a well-leased asset with long term tenants is preferred over an asset that turns over tenants regularly. There is a common misconception that A-REITS are correlated with the Australian property market. If you look at the chart below, you’ll see that both Vicinity Centres (shopping centres) and Cromwell (office) share very little correlation with the residential property market for obvious reasons. It can be argued however that a residential property collapse will affect the overall economy and will hurt consumer spending and confidence. This in-turn may cause a tenants to pack up and vacate if business goes sour. The Amazon effect has caused huge to A-REIT’s that hold shopping centre and warehousing assets. It will have a positive effect on industrial A-REITs that build warehouses and a negative effect on those that house shopping centres. The other factor that needs to be considered is interest rates. A-REITs must pay out all of its taxable profit as a dividend to shareholders. So that makes them a stable, high yielding investment asset. It also makes them a bond proxy. A-REITs act like bonds. They are stable, safe haven and low risk type of asset that returns regular coupon bond type dividends. It also means that A-REITs have begun to move in an inverse direction to the 10 year Australian Government Bond. A-REITS shake off Amazon effect and…

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