Quick Insights into Retail REITs

Snippets from the book "DIY Guide to Winning with REITs"

One of the best things about investing in reits is that you have the opportunity to invest in a sector that interests you. It is therefore important for a reit unit-holder to understand the risks involved in each type of reit and the dynamics of the sector in which they reside. As the famous Warren Buffett once said “Never invest in a business you cannot understand”.

With this in mind, let’s dive into the different types of reits and what each of them can offer you as an investor.

Retail REITs

Understanding area dynamics

Ideally, you want to invest in Retail reits that own malls and shopping centers which consistently draw in the crowds and have the potential to continuously revise rental rates upwards. Such retail properties are usually located in a crowded, prosperous nation with limited land space.

Besides land space, other salient factors include strict governance on where certain things should be sold and unforgivably hot, humid weather; this virtually guarantees that well-managed malls equipped with air conditioning will see consistently high traffic, and thus justifies higher rents charged by the Retail reit.

When we look at America, where land is abundant, and particularly in many parts of the country where the weather is friendlier, people in those areas will mostly prefer to spend their free time at the beach, in the countryside or by engaging in outdoor activities rather than dwell in shopping centers. This means that if your Retail reit owns malls along these areas, where the ‘shopping’ mentality is feeble or absent; the performance of your investment might not be that desirable.

In addition, areas with high crime, theft, murder and vandalism rates should also be taken into consideration when doing due diligence on the quality of the malls in a Retail reit. Many malls across America have been abandoned simply because the area was just not conducive enough for proper retail activity. You would want to avoid Retail reits that have or plan to have malls in questionable areas.

Therefore, it is important to understand the countries and local areas in which the properties of the reit are located, as location is one of the factors that determine whether the reit can continue to deliver yields in the foreseeable future.

The advantages of investing in a Retail reit

One advantage would be the ease of conducting due diligence. Due diligence on retail reits can be done by simply walking into a mall and spending some time observing the location, mall architecture, tenant mix and type of shoppers. With such information, you can obtain a first-hand idea of the earning power of that mall, unlike other types of reits where observing the property from within can be difficult or prohibited.

If a mall is too far from your location, ask a friend or pay someone to do the due diligence for you; it’s as simple as that.

Another advantage Retail reits have over the other reits is the “stickiness” of their tenants. Unlike an office or industrial tenant who can just snap their fingers and move to another area for the sake of cheaper rent, retail tenants are more wedded to their locations because of their regular customer base.

“A hallmark of a vibrant Retail reit is one whose management is proactive in organizing events, holding competitions and actively engaging people to come into their malls. Suntec Real Estate Inv. Trust (T82U.SI) is an excellent example; the reit hold multiple entertainment events, invite celebrities to meet and greet fans, hold competitions, host international conferences, and organised sale bazaar fairs and travel roadshows to continue to make their shopping malls attractive.”

Online shopping vs. Retail REITs

No one can deny that online retailing poses a formidable threat to malls and the level of patronage to them.

Although some malls may well lose some tenants due to online competition, at least for the next 10 years (in my opinion), people will continue to frequent malls for their personal services and the joy of being physically there to buy products – something which e-commerce cannot replace. Retailers have also shown they have what it takes to engage the consumers and persuade customers to part with their dollars.

Now that you have gained a bit of insight into Retail reits, let’s move on to the next type of reit.

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