As in picking a school, the decision to go public or private with your REIT investment will have significant impact on your wallet.
With the housing market in flux, more and more investors are investing in those real estate investment trusts to diversify their portfolios. And with companies like Allied Properties REIT (TSX:AP.UN) announcing plans this week for a $21.3 million expansion into Western Canada, it’s no surprise investors are doing their research.
One key consideration? The difference between buying a publicly-listed or private REIT.
“The main difference between a private and public REIT is how they’re structured,” says Marcel Greaux. “In a public market REIT, your evaluation is based on the current market value. So if an announcement is made that causes the market to go down and you buy into that REIT, you’re not necessarily buying the value of what that’s property is worth.”
Conversely with a private REIT, the evaluation of worth is based on the aggregate of the portfolio assessed by an independent appraiser.
“You’re always buying units at the appraised value as opposed to market value with a public REIT,” he says.
So what else should investors consider when deciding to go private or public?
- With a public REIT, your unit value may be diluted from commissions and fees associated with public trading. “With a private REIT, you don’t have those fees from the constant trading so the value may be somewhat more insulated,” says Greaux.
- There is more flexibility when it comes to moving your money in a private REIT. “With a private REIT,” Greaux explains, “when the property increases in value you can essentially get your money out through cash distributions, or if there’s a refinance, you can invest your units at a high dollar into new projects.”
- Greaux recommends investors consult a lawyer or accountant when shifting to REITs, as there are tax advantages to trading in securities.
- The main thing you want to look at with a REIT is who’s running them. Greaux advises to do due diligence on the management team and its history before deciding to buy. “You want to know their history and performance, because you’re totally hands off and you have no say essentially in how that portfolio is run,” he says.
- Lastly, Greaux advises investors to leverage their options when it comes to leases. “Make sure they have long-term leases that stagger in their due date, so that your cash flow from the distributions remains consistent.”