Stocks and FX are common as diversified investment destinations other than virtual currencies, but if you want to increase diversification, real estate investment is also an attractive option.
However, buying real estate can be expensive and risky. Therefore, if you do not have deep knowledge of real estate investment, we recommend that you consider investing in a REIT, which has the advantages of both real estate investment and securities.
REIT stands for “real estate investment trust”, and is a financial product that invests in multiple real estate with funds collected from investors and distributes the profits to investors. Since the actual real estate is not purchased, it is possible to invest from a small amount, and high liquidity is secured like stocks and bonds.
In this article, we explain “Overview of REITs”, “Advantages and disadvantages of investing”, and “How to invest in REITs”, so you can learn if you are eligible for diversified investment by understanding the basic knowledge.
- table of contents
- REIT stands for “Real Estate Investment Trust”
- REIT investment targets are mainly 6 types
- 3 Benefits of Investing in REITs
- Two Disadvantages of Investing in REITs
- How to invest in REITs
- Understand the merits of REIT and start diversified investment
1. REIT stands for “real estate investment trust”
A REIT is a real estate investment trust that invests funds collected from investors in multiple excellent properties and distributes rental income and sales gains. Since the real estate investment corporation selects, acquires, manages, and operates real estate, investors do not purchase actual real estate. REITs are listed on the market, can be bought and sold in the same way as stocks and bonds, and are characterized by being easier to cash than physical real estate.
Please note that REIT prices fluctuate on a daily basis due to factors such as trends in the real estate market, interest rates, and economic conditions. The total market capitalization of the world’s major REIT markets is approximately 189.7 trillion yen, and among them, the market capitalization of the US market, where the REIT structure was created, is the largest with approximately 132.8 trillion yen.
Since the REIT market can be divided into the “REIT market with a long history” and the “REIT market with a short history”, some of the target countries are introduced in the table below.
|REIT market with a long history
|America (1960), Australia (1971)
|REIT market with a short history
|Japan (2001), South Korea (2002), France (2003), Hong Kong (2005), UK (2007), Germany (2007), Italy (2008)
*() indicates the REIT start year
Australia is one of the most liquid REIT markets after the US. The REIT market that has just emerged in developed countries, including Japan, and the REIT market in the Asian region have a short history and can be said to be still in the process of growth.
2. REIT investment targets are mainly 6 types
There are six main types of real estate that REITs invest in:
- Offices (buildings often used for business, such as offices of financial institutions and companies)
- Housing (residential properties such as condominiums, apartments, and single-family homes)
- Hotels (accommodation facilities such as hotels, inns, and resort facilities)
- Logistics (facilities such as warehouses and distribution centers)
- Commercial facilities (shopping malls, outlets, facilities that provide products and services)
- Healthcare (hospitals, nursing homes, nursing homes, and other medical and nursing care facilities)
In addition, REITs can be divided into two types, “single-use specialized type” and “complex type”, depending on the type of investment target.
A single-use specialty REIT is an investment in properties for a specific purpose. For example, we specialize in investing in real estate for only one purpose, such as “specializing in offices,” “specializing in housing,” and “specializing in hotels.” Investing in one type of real estate makes it easy to predict price movements, such as office prices tending to rise when the economy is good, and hotel prices tending to rise when tourists increase.
On the other hand, if you invest only in the same type of real estate, the diversification of investment destinations will decrease, so in the example above, if the economy is bad, office prices will drop, and if tourists decrease, hotel prices will drop. The challenge is to bear a large amount of risk under certain conditions.
A mixed-type REIT refers to a REIT that invests in real estate for multiple purposes. In addition, REITs that do not specify three or more types of uses or uses are sometimes called “comprehensive REITs.”
Composite type and comprehensive type invest in multiple types of real estate, so you cannot expect a large return compared to single-use specialized type. On the other hand, it can be said that the advantage is that it is easy to secure price stability due to the high degree of dispersion.
3. 3 Benefits of Investing in REITs
There are three advantages to investing in REITs: high yields, low entry costs, and high diversification effects.
3-1. High yield can be expected
Many REITs distribute most of their cost-less earnings to investors as dividends, so you can expect high yields. For example, in Japan and the United States, corporate tax is effectively exempted by distributing 90% of profits to investors and meeting certain requirements.
Therefore, unlike ordinary companies that decide the amount of dividends and internal reserves on their own, REITs, which distribute most of their profits to investors, have an attractive dividend yield.
In fact, the average dividend yield of Japanese REITs over the past five years from 2022 is “minimum 3.60% to maximum 4.15%”, and compared to Tokyo Prime’s dividend yield “minimum 1.67% to maximum 2.24%”, REIT yield You can see the height of
3-2.You can start with a small amount of investment capital
If you actually buy a real estate property and invest in it, you need a lot of money, from several million yen to tens of millions of yen.
However, there are REITs where you can invest from tens of thousands of yen to hundreds of thousands of yen, and some of them can be invested from 100 yen. Since funds are collected from multiple investors and invested, there is no need for a large upfront investment on an individual basis.
It can be said that it is a great attraction that you can start with a much smaller amount while enjoying the benefits of real estate investment.
3-3. Diversified investment in multiple properties
With a REIT, you can diversify your investment in multiple real estate properties just by purchasing one product, so it is possible to diversify risk and stabilize earnings. For example, you can diversify and invest in real estate types and regions, such as “offices and residences” and “Japan and the United States.”
Also, REITs tend to move differently from stocks and bonds due to different price fluctuation factors. Investing in REITs with low correlation in addition to stocks and bonds can be expected to further increase the effect of diversified investment, and can be said to be a promising option as a diversified investment destination other than cryptocurrencies.
4. Two Disadvantages of Investing in REITs
On the other hand, there are also disadvantages to investing in REITs as they are investment products.
4-1.Possibility of loss of principal
Since REITs are not principal-guaranteed, the principal may be lost due to various factors. REIT prices fluctuate due to changes in the real estate market, interest rates, and the overall economy. Therefore, if the economic situation suddenly worsens, the value of the real estate may fall immediately after the investment, and the principal may be lost.
In addition, since the relationship between demand and supply determines the value of REITs, if sufficient rental income is not collected, it is expected that real estate sales and dividend payments will be reduced. As a result, there is a possibility that the value of the REIT will further decline and the principal will be lost, so it is important to diversify the investment targets and reduce the risk of loss.
4-2.No effect of compound interest
Dividends earned from REITs are not reinvested and are distributed to investors each time, so you cannot get the “compound interest effect”.
The effect of compound interest is to add the profit obtained from investment to the principal and invest it again, and by reinvesting the profit obtained, further profit is generated, and the longer the holding period, the greater the effect of compound interest. .
Of course, by purchasing additional REITs with the distributed dividends, you can get the same effect as compound interest. However, keep in mind that dividends alone may not be enough to buy a REIT if the dividends distributed are small.
In this way, REITs cannot aim to efficiently increase profits through long-term holdings using the compound interest effect, and in that sense, they may not be suitable for long-term holdings.
5. How to invest in REITs
Finally, let’s talk about how to actually invest in REITs.
5-1. Select a REIT to invest in
Since there are many types and characteristics of REITs, first select a stock based on the following three conditions.
- (1) Investment target
Choose the type of real estate you want to invest in, such as offices, residences, and hotels, and the country you want to invest in. Instead of investing in Japanese REITs, there is also the option of investing in countries such as the United States, which have a larger REIT market than Japan. Different real estate properties are affected by economic conditions, so choose a REIT that allows you to diversify your risks.
- (2) Dividend yield
Make sure that not only is the yield high, but that the dividend is distributed stably. High-yield REITs may sell properties and temporarily increase their earnings, resulting in higher yields. In that case, even if the rental income is decreasing, the yield may rise temporarily, so when choosing a REIT, it is important whether the dividend is distributed stably.
- (3) Rating and market capitalization
Choose a REIT by referring to third-party ratings and the company’s market capitalization. Ratings are determined by looking at a company’s financial statements and operational status, the management capabilities of the investment company that actually manages the investment, and the quality and stability of the properties it owns. In addition, market capitalization can be calculated by multiplying the stock price by the number of issued shares.
5-2. Purchasing a REIT with a Brokerage Account
After selecting a stock to invest in, actually buy a REIT with a brokerage account.
- Brokerage account commentary
If you do not have an account with a securities company, choose a securities company that suits your purpose and open an account.
- deposit money into the account
Fund your REIT purchase using a bank transfer, wire transfer, or credit card.
- Order REITs
Search for the REIT you want to invest in, decide the number of purchases and order type (market order, limit order) and place an order.
After purchasing, check the REIT price regularly and consider the timing of the sale. In addition, since most Japanese REITs close their accounts twice a year, they can receive dividends twice a year if the operating conditions are good.
6. Understand the merits of REIT and start diversified investment
This article provides an overview of REITs, their advantages and disadvantages, and how to invest in them.
REITs do not buy actual real estate, but can be purchased from a small amount because they invest by collecting funds from multiple investors. In addition, since there are various products depending on the type of real estate and country, it is possible to reduce the risk of loss by diversifying investment targets.
In order to reduce the risk of loss, invest in a REIT that not only has a high yield, but also pays attention to whether dividends are distributed stably and whether the real estate and regions in which it is invested are unbalanced. prize.