Diversification through REITs

Real estate is a common alternative investment option that can help diversify investment risks in a portfolio. However, investors may be reluctant to enter the real estate market due to the high prices of properties.

Apart from buying and selling properties, there are some investment tools in the market, such as Real Estate Investment Trusts, commonly known as REITs, allowing investors to gain exposure to the real estate market.

A REIT is a collective investment scheme constituted as a trust that invests primarily in real estate, with an aim to provide investors with returns derived from the recurrent rental income of the real estate. In Hong Kong, REITs available to retail investors must be listed on the HKEX and are traded like stocks.

When it comes to real estate investment, most would think of residential and commercial properties. In fact, real estate is a broad and diverse asset class. In addition to the two property types mentioned above, it also covers hotels, shopping malls and office buildings, which are considered less accessible for retail investors. REITs can invest in hotels, office buildings, shopping centres, car parks, logistics centres and data centres, among others. Some of the REITs listed in Hong Kong primarily invest in hotels, shopping malls, office buildings or logistics centres, while some hold a mixed portfolio of shopping malls, car parks and office buildings.

Meanwhile, REITs can also invest in properties in different regions. While some of the REITs listed in Hong Kong focus on local properties, others are on real estate in Mainland China, overseas or across multiple markets.

Investors may diversify their portfolios across different types of properties and markets using REITs. As the economic and industry factors faced by such properties vary, they will have mixed rental performances.

If investors want to include REITs in their portfolio, they should first understand the REIT’s portfolio mix and evaluate the level of diversification. Some REITs generate income primarily from a single property. If any issues arise, the income and distribution may be severely affected.

In April 2024, the China Securities Regulatory Commission (CSRC) announced the inclusion of REITs in the Stock Connect regime, allowing Hong Kong investors to invest in eligible REITs in the Mainland, providing access to a broader range of REITs.