REITs in New Zealand - The Definitive Guide

Our must-read guide explains what REITs are, the pros and cons, what you're investing in, risks and frequently asked questions

Updated 15 July 2024

Summary

Investing in real estate is one of the most common pastimes for many New Zealanders. However, with house prices rising rapidly and interest rates rising, it has become increasingly challenging to get on the property ladder for many New Zealanders. A less common alternative to direct property investing that provides some of the same key benefits is a Real Estate Investment Trust (REIT).
REITs can be a great addition to an investment portfolio to gain exposure to the broader property market. However, many people are unsure what REITs are, how they are constructed, and how REITs make money.
This guide explains what REITs are, how they work, how the average New Zealander can access REITs and the pros and cons of investing in them. We also walk through New Zealanders' frequently asked questions when considering investing in REITs.

To help explain REITs in detail, our guide covers:

Know this first: REITs do not invest in residential property - their focus is commercial and industrial property. We are currently unaware of any investment fund or app which specialises in residential property.

MoneyHub Founder Christopher Walsh shares his thoughts on REITs

"New Zealand has a limited number of REITs you can invest in. Historically, there have been good REITs that have performed well. However, there have also been some downright scammy REITs that have rewarded the manager with a 'heads I win, tales you lose' setup. This is why it's critical to understand what you're investing in before putting down any money.

I like REITs because they give exposure to property without the hassle of being a landlord. Also, REITs focus on commercial tenants (offices, retailers etc.) and sign their tenants for long periods. New Zealand has seen REIT innovation in the last few years. Kernel is one fund manager with a property fund, the NZ Commercial Property Fund. But there are others - Smartshares' offers its Smartshares NZ Property ETF and Smartshares Australian Property ETF.

If you're looking to invest overseas, the choice is extensive. Australia has around fifty REITs listed on the ASX (per this directory). Publications such as Kiplinger, Investopedia and Fool.com constantly publish "Best REIT" (or similar) lists to help potential investors. If you want to invest in overseas property, a US-listed ETF is arguably one the cheapest way to do it".

Christopher Walsh MoneyHub Founder

What is a REIT, and How Does it Work?

a. The Structure of a REIT:

A REIT is the name of a holding company that pools investors' capital from a broad number of investors. Then, the manager of the holding company will finance, purchase, operate and maintain the properties in the portfolio.
There are many different types of REITs, just like there are many different properties that you can purchase. REITs can be made up of many different apartment or standalone homes. They can be office buildings, warehouses, shopping malls, data centres, hotels, or any above combination.
There isn't a specific type of real estate that a REIT must own to be considered a REIT. But generally, most REITs will hold and own commercial real estate (such as Sylvia Park mall or PwC tower). The most common REITs in New Zealand are retail, commercial and industrial sectors.

b. How REITs Make Money

Most REITs make money by borrowing money from banks to purchase properties, lease out the space and use the proceeds to pay off debt, pay dividends, or acquire new properties. One of the main reasons people purchase REITs are the high dividend payouts compared to other stocks or sectors.
REITs also make money on the eventual sale of their properties, but this will typically be subject to taxes and costs. The dividends paid out to shareholders will also be subject to taxes.

c. Getting Access to REITs

Some REITs are unlisted (meaning they cannot be easily purchased or sold on a stock exchange), while others can be easily bought and sold on a publicly listed exchange such as the New Zealand stock exchange (NZX).
Some REITs invest in local New Zealand properties and offshore REITs that own property in places like the United Kingdom, the United States, and Asia.
The easiest way to invest in REITs is through brokerage platforms like Sharesies, Stake or Hatch. These platforms typically provide the lowest fees possible and have a wide variety of REITs available to purchase. Out of the New Zealand choices, popular REITs include the Goodman Property Trust, Precinct Properties, Kiwi Property Group, Argosy Property and Stride Property Group.
Concerning offshore REITs, Australia has many individuals Listed REITs (commonly known as A-REITs). In addition, the Australian market provides more specialised REITs, given their capital markets are much more developed. This gives investors a much larger suite of REITs to choose from
It is important to note that most REITs will be relatively large, so they will typically be included in many different broad index funds. For example, if you have KiwiSaver or investments in the NZX 50, you will already have some indirect exposure to these REITs. Be aware that investing in REITs when you already have exposure to the property sector will significantly increase your concentration in this area. You may already have sufficient exposure through your indirect holdings.

Why Do People Invest in REITs?

In a low-interest-rate world where bonds and term deposits are paying next to nothing, REITs can provide a strong source of income for people who want a steady income each year. REITs can be ideal for retirees or people looking to supplement their current income from their primary job.

Due to the diversified nature of many REITs by holding many different properties in various industries, REITs can be significantly more diversified than single stocks alone. This can help to absorb the volatility of your portfolio in turbulent times. Further, REITs are typically run by experts in the property sector with deep insights into which properties are of the highest quality and can be purchased for the best price.

Key Risks to Know Before Investing in REITs

Before investing in REITs, it's important to understand the key risks. REITs are not risk-free.
REITs are concentrated in the real estate sector, and they can still hold significant risks. For example, during the global pandemic of 2020-2021, almost all commercial property REITs decreased in price as most tenants were not allowing employees to work in the offices. This led to some tenants breaking their contractual agreements and significantly impacting REITs' yield.
REITs are also leveraged, meaning they may borrow money from banks to purchase the property. This can be a source of risk if interest rates increase, or the REIT could not make their interest payments (which occurred to some REITs in the pandemic).
We strongly suggest you research the management team's track record running the REIT and the fee structure you'll be paying for them to manage it. Most REITs will have key statistics such as the management fee, dividend yield and sector focus in their investment documents. It's essential to understand these documents before considering investing.

Despite the risks, there are still many benefits to investing in REITs, such as diversification, strong yield, and consistent cash flow with those risks in mind.

How am I able to make money from investing in REITs?

The two main ways to make money from REITs are capital gains and dividend payments:

1. Capital Gains

As the price of an underlying property increases, so too does the value of the REIT. Technically, the REIT is a collection of properties. Therefore, if the underlying value of these properties rises, the value of the REIT rises too.
REITs will display the Net Asset Value (NAV) of their properties on each REIT to display what the portfolio is estimated to be worth. Over time, as this increases, the value of the REIT should increase with it.

2. Dividends

REITs typically have many properties, with even more tenants paying rent each week or month. After paying down interest debt and other fees, the excess income earned from these properties is paid out to REIT shareholders as a dividend. Most of the time, this dividend is paid out quarterly or bi-yearly.
As time goes on, REIT managers typically increase the rent charged to keep in line with inflation or when a tenant takes out a new lease. As a result, the rent received (and the dividend paid out) will likely increase in proportion with this.
Dividend yields from REITs are typically above the yield you would get if you invested in most blue-chip stocks and bonds due to the leveraged nature of the REIT. Additionally, REITs can be structured so that almost all excess income is paid out as a dividend (something companies are not obliged to do).

What REITs are Available to Invest in from New Zealand?

Most New Zealanders can buy shares in a REIT through the New Zealand Stock Exchange, similar to other publicly traded shares. You can invest in publicly traded REITs by purchasing shares through an online share platform (for example Sharesies, Stake, Hatch, Jarden Direct or ASB Securities.) which cover the New Zealand, Australian and US markets.

Know This First: Before investing in REITs, make sure you understand what you are buying into. The first step should be to research the REIT's management team and track record and determine how they're compensated. If it's performance-based compensation, it's most likely they will work hard to select the appropriate investments and choose the most straightforward strategies. It is also a good idea for investors to take the time to analyse the numbers such as earnings per share and current dividend yields.

As an example, Stride Property Group was caught in a legal battle over management fees. It ended up paying two directors over $40m to leave the business. Such events highlight that while property is seen as low risk, issues can arise which involve high costs.

How do I invest in REITs?

The easiest way to get access to REITs is through a brokerage platform like Sharesies, ASB Securities or Jarden Direct. Alternatively, it is possible to invest directly through a fund manager (e.g., Smartshares or Kernel). Some of the most popular REITs in New Zealand include:

Additionally, Smartshares offers two specific property-based ETFs:

Investing in overseas REITs

Australia has a large number of individual Listed REITs (commonly known as A-REITs).
The Australian market provides more specialised REITs, given the larger market size and broader properties to choose from, as outlined in this ASX list.

Investing in REITs - Pros and Cons

Pros

1. Steady Source of Income

Most stocks can be relatively volatile, and many growth-oriented stocks will not produce high yields on dividends, if at all. Looking at bonds, the yields on these have been significantly compressed as interest rates have dropped. As such, the hunt for yield has become more complex and challenging.
With REITs, most businesses require space to run their operations. As a result, the respective yields gained from rent can be significantly higher and more stable for sectors like commercial property than other asset classes. This is one of the core benefits of investing in REITs versus other asset classes.

2. Affordability

Buying a residential property is relatively expensive. Buying a full-scale commercial property is significantly more expensive, complex and difficult.
However, by investing in a REIT, you're effectively able to get exposure to high-quality commercial assets at a significantly lower entry point (as little as $1,000 on platforms like Jasper).
In addition, REITs effectively allow most New Zealanders to access commercial properties, an option that traditionally was only limited to the wealthy or those with contacts in the industry.

3. Accessibility

Property is extremely illiquid (it takes a significant amount of time and energy to buy and sell commercial or residential property). However, listed REITs are very liquid, given most REITs in New Zealand are actively traded on the New Zealand stock exchange.
This means you're able to buy and sell them relatively quickly on any day and time. In contrast to traditional real estate, it can take months to shop around to find a buyer if you're looking to sell, and during that time, the market can fluctuate wildly. REITs provide the ultimate way to access the property without the drawbacks of illiquidity.

4. Less Hassle Than Direct Property Investing

REITs give you the ability to be a landlord for several different properties without handling day-to-day management. Instead, the property manager deals with most things you would traditionally need to deal with, such as finding new tenants, negotiating leases, dealing with leaks and other property damage and fitting out spaces.
You're able to pay a property manager or REIT manager to effectively manage all of this for you in exchange for a small management fee.
REITs can be a great way to invest in property without "getting your hands dirty". However, the property managers are compensated for this through the annual fee for managing the REIT. These fees can be reasonable, but they can also be extremely excessive. Therefore, it's important to understand how much you'll be paying in the investment documentation when you consider buying shares in a REIT.

5. Less Volatility in Pricing

REITs can play a crucial part in an investment portfolio as they offer a robust, stable dividend and the potential for capital appreciation in the long term.
REITs can be less volatile than the other assets in your investment portfolio, as they may be uncorrelated to the rest of the stock market. However, this will largely depend on the type of REITs you invest in and the specific sectors the business that leases from your buildings operate in.

6. Diversification

One of the inherent benefits of a REIT is that they invest in a basket of different properties. This means that your money is not concentrated solely in one sector, geography or type of property. This broad diversification can be helpful in less ideal market conditions, where a particular industry may get poorly hit.
For example, the 2020-2021 pandemic had an initial adverse impact on retail operators, which led to decreased rent rolls and an increased number of tenants breaking their leases.

Cons

1. Your Returns are Tied to Property Prices

When you purchase a REIT, you are effectively investing in property. Therefore, any influences on the property sector, whether structural, regulatory or business-oriented, will influence the price of the underlying properties (and the price of the underlying NAV of the REIT).
Specifically, concerning commercial REITs, factors such as business confidence, supply of new buildings and vacancy rates in the surrounding areas will all play into the ultimate price of the properties and the yield you are likely to receive. In addition, if anything were to happen that would impact your properties, this would be reflected in the price.
While REITs can provide a solid return through price appreciation, most of the total REIT returns will be through dividends. This can be a substantial benefit in good times but can also be a source of risk. In downturns, higher vacancy rates may lead to significant cuts to the income from your property which would result in less dividend income). Many different factors may play a part in property prices, so it's important to understand the risks you're taking when you buy into REITs.
Further, macroeconomic factors such as interest rate changes will also affect the relative value of your underlying properties (and, therefore, the price of the REIT). For example, falling interest rates are typically a tailwind for property resulting in fewer interest payments and a larger incentive for companies to borrow, but this works in reverse. As interest rates rise, borrowing becomes more expensive for the REIT owners and the tenants. This can cause a decline in business confidence and result in higher vacancy rates (further reducing the income of your REIT).
In summary, many things can influence the price and income, and it's important to know that a REIT is still subject to all of these risks.

2. Tax Implication of Dividends.

Dividends paid out to REIT holders are typically taxed as regular income. This has significant implications for investors and any future growth in investments. For example, one of the key benefits for stocks versus bonds is that the gains from stocks can typically compound in value tax-free (e.g. a company's stock can grow 15% each year for the next decade without paying any taxes).
In contrast, each time a company pays a dividend, the REIT manager will need to pay taxes on your behalf (imputation credits), limiting the speed at which an investment can compound.
Further, most REITs in New Zealand have high management and transaction fees associated with setting up the REIT structure, managing the properties and dealing with any other issues. This can drag on returns and should be factored into your analysis before investing.

Frequently Asked Questions

REITs are relatively simple and low-risk compared to other shares, but they're not for everyone. We anticipate common queries below regarding risk and investment terms, among others.

Is it safe for older investors to be invested in REITs? Conversely, should younger investors be invested in REITs?

There is no correct answer here. REITs provide several benefits to New Zealand investors, but each investor will have different risk tolerances and longer-term goals they are looking to achieve.

In general, REITs can provide a steady income stream that older investors/retirees may be looking to supplement their pension payments (the 4% rule may no longer hold given bond yields). More information on the 4% rule can be found here.

On the other hand – younger investors have a more extended period to compound their wealth (30 – 40 years of investing time). As a result, they may prefer to opt for capital appreciation (tax-free compounding) rather than the stability of dividends.

However, this is a generalisation and may not apply to all situations. It will ultimately depend on what New Zealand investors value more – security and stability or capital growth and compounding.

I see a lot of terms like 'NTA' and 'Occupancy Rate' mentioned when reading about REITs - what do these mean?

Many REITs provide annual reports for investors to read about the wider industry, market, and underlying properties. In these reports will be several different terms and ideas. The most popular REIT-related concepts are below:

1. Net Tangible Assets (NTA)
This is effectively how much the property portfolio is worth once the debt is taken off. It is typically expressed as a dollar amount per share (e.g. $5 per share). Most of the time, a REIT's share price will closely mirror its NTA – but this can fluctuate between a discount or a premium from time to time (mainly due to demand levels for the REIT at any given time).
2. Occupancy Rate

An occupancy rate is the proportion of the property currently leased out. E.g. if your occupancy rate is 90%, 90% of the floor space will be leased out. You won't earn income from space that isn't leased out – so higher occupancy rates are more desirable. The higher the occupancy rate, the more money a REIT will generate.

3. Debt

REITs are no different from traditional residential properties when it comes to debt. A large chunk of the purchase price for commercial properties (and therefore REITs) will be paid for in debt. One difference is that debt is typically used more conservatively than residential properties.
While Loan Value Ratios (LVR) for residential mortgages can go as high as 90-95%, a typical LVR for REITs is between 20-50%. A higher LVR likely means more risk and more sensitivity to interest rates. Still, debt isn't necessarily a negative thing as it gives REITs the capacity to expand and develop their portfolio will provide relatively less cash down.

Is investing in overseas REITs better than New Zealand REITs?

REITs generally hold the same characteristics regardless of location (e.g. people still need a warehouse to store goods, a shopping mall to sell goods or office space for employees to work). However, some REITs are located in more desirable locations or cities with larger populations (For example, Sydney has around 5 million people versus 1 million people in Auckland). These differences can influence the relative risk/reward levels associated with REITs.

Understanding what is actually in the underlying REIT is essential when investing in offshore REITs – but ultimately, the REITs in New Zealand will be of the same stability and quality as offshore REITs.

How many properties need to be purchased to be considered a REIT? Is it better to have more properties in a REIT?

To be considered a REIT, there isn't a defined limit number of properties you need to purchase. A REIT is just the name to classify investing in a holding company that invests, owns and manages multiple properties. You could have just one property, and it could be classed as a REIT, or you could have hundreds of properties across all different sectors, and it would still be classed as a REIT.

The definition of REIT is extremely broad, which is why it's important to read the investor prospectus carefully to understand what you are actually buying.

REITs - Summary and Conclusion

Investing in REITs can be a great way to access quality income and capital appreciation from both onshore and offshore properties. REITs lower the barriers to entry of investing in commercial property are an incredibly accessible option to retail investors to get exposure to property. However, investing in these structure products comes with inherent risks such as liquidity, fees and market factors. REITs can definitely be a useful addition to your portfolio, but it is highly recommended to understand the risks you face before investing.
REITs have a number of attractive features; stability, liquidity, exposure to property without the obligations that go with it, and exepcted capital gains and dividends over the long term. However, they're not for everyone - property is popular when the economy is strong but it may fall out of favour when things change.
If you want to invest in REITs, there are many options that focus on the New Zealand market and internatinal opportunities. While the New Zealand market is limited to small numbers of options, there are plenty of US-listed REITs that invest throughout the world. If you're looking ideas as to what REITs may be an option, the best approach is to read trusted investing sources. Recent examples include Kiplinger, Investopedia and Fool.com. These publications constantly publish "Best REIT" lists, so search for the latest data to help you make an informed decision.

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