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Benefits and risks

A-REITs can offer a range of potential benefits, including diversification, a regular income, and capital growth. However, like any investment, A-REITs also have risks you need to understand, including the potential to produce negative returns. You should seek independent advice from a professional adviser before investing

Benefits of investing in A-REITs

Diversification

Investing in an A-REIT could give you instant access to a large property portfolio for a small upfront investment. Depending on the A-REIT you choose, it may also offer diversification across property sectors, geographical locations and asset types. 

A regular income

Many A-REITs are designed to provide a sustainable income stream, with monthly or quarterly distributions underpinned by regular rental income. Depending on the investment and the economic environment, they can potentially offer an attractive yield in comparison with residential property or some other income-oriented investments. However, it’s also important to note that this higher income may involve higher risk.

Liquidity

Compared to a direct residential or commercial property investment, A-REITs can be easily bought and sold on the ASX, like shares. And unlike direct property, they give you the ability to gradually build or sell part of your investment, rather than buying or selling an entire property.

Tax planning

A-REITs can sometimes make tax deferred contributions, when a high level of deductions for items like depreciation, capital allowances and refurbishment costs leaves them with a distributable income higher than their taxable income. That may enable investors to manage the timing of their tax liabilities, potentially deferring tax payments until their marginal tax rate is lower.

However, tax laws can be complex and everyone’s situation is different, so it’s important to get professional advice before you invest.

Risks of investing in A-REITs

Concentration

While some A-REITs provide access to a diversified portfolio, others concentrate on a few large assets or a single sector, leading to higher risks.

Property cycles

Real estate can be sensitive to macroeconomic factors and market cycles, impacting your returns when the market environment worsens.

Volatility

A-REITs may also be sensitive to movements on the broader sharemarket, leading to higher levels of volatility than a direct property investment. As a result, the market value of an A-REIT may not always reflect the net asset value of the underlying property portfolio.

Gearing

Some A-REITs may use borrowed funds to buy or develop a property portfolio, creating high levels of gearing. While gearing can multiply capital gains when asset values rise, it can also multiply losses when they fall, as well as creating higher interest costs.

Interest rates

Rising interest rates can have a negative effect on A-REIT performance, both by increasing interest costs and by making fixed-income investments more attractive to income-oriented investors, potentially reducing overall demand.