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3 Main Areas You Need To Know About Industrial REITs Before Investing
Even though you could be very well-versed in real estate investments and totally comfortable with putting your funds in REITs. These investment products are still different from the conventional way of property investing that we know off. And there is absolutely no shame to admit that you don’t quite understand how it works. A straight forward fund can be complicated enough to comprehend, and you could going even further from your comfort zone when your target fund is an industrial REIT.
You might not even bat an eyelid when you are sure that the market for residential properties is on the uptrend. But when you are not in-sync with what is happening in the industrial sector, don’t make the mistake of assuming it would be the same as how you understand residential. Here are some areas to spend some time in investigating before taking the plunge into a REIT that has an industrial focus.
Nature of assets
If you are new to this, you might already feel that industrial is a niche within real estate. You are therefore narrowing your focus to serve a very specific market. That is so wrong. Industrial is just a category within real estate. There are many types of niches within this category you can identify and segment out. Surely you do not want to end up with a REIT that has a huge portion of it’s portfolio in low end easily replicated assets.
For example, you might think that warehousing is an area that the masses are not into. But if your warehousing facilities are easily duplicated by competitors, you can expect competition to pop up like mushrooms when your success becomes evident. A REIT comprising of such assets will not have a competitive edge for long. You should preferably go for funds that comprise of assets that have a high barrier to entry. For example, an unbeatable location, million-dollar supporting facilities, high-tech security, etc. There must be a factor that others will find difficult to replicate. Commercial tenants will always be willing to pay a fair price for premium services.
The bottom line is that if you have a special facility that serves a specialised need, customers will go to wherever you are located as your facilities are essential for whatever product or services they sell. An example is storage facilities for gold.
Industrial land is not often freehold. Most of the time the land is leased from the governing authorities for a specific period of time before it has to be returned. Their leases also tend to be shorter than residential leases. This is a big difference compared to freehold residences. Because at the back end of the lease, the closer the lease gets to expiry, the lower it’s value.
Let’s just use a very general simple example. If we are to compare a $1m 99-year residential home with a $1m 60-year industrial unit, we can see that how much a residence will depreciate in 3 years will be matched by an industrial unit in about 2 years. So put some attention on how much the industrial assets in a REIT are valued and whether they make sense to you. Appraisers are human too and they can make glaring mistakes.
Also be mindful that your focus as an investor in REITs is continuous dividends and capital gains. Falling property values will not affect you unless they affect the REIT. That is something to think about when deciding which way to go with your investments.
Manufacturers all over the world are moving their industrial operations to China, if they have not already done so. And this is just the manufacturing sector we are talking about. Industrial real estate environments are very dependent on government policies. Big companies can decide to move from one place to another just for a more favourable bottom line. Even from country to country. Government policies can greatly influence their bottom lines. Keep this in mind when researching the strength of the assets in the REIT you have in mind.
When economic conditions take a turn for the worse, companies in the industrial sector are often the first to get hit. This leads to extended vacancies and lower rentals. That is not to say that the commercial and residential sectors are not affected. It is just that industrial real estate will be hit the hardest and fastest.