Why Are REITs a Good Investment?

Commercial real estate is a foundational asset class for wealth creation. However, acquiring high-grade real estate assets, such as CBD office buildings, large-format retail centres, or industrial properties with scarce hardstand, typically requires capital beyond the reach of the individual. Real estate investment trusts (REITs) bridge this gap. Just as mutual funds enable collective investment in broad stock holdings, REITs allow investors to pool capital to access an echelon of income-producing properties that deliver both robust yield and long-term capital appreciation.

Not all REITs are created equal. To find the right option for your investment portfolio, evaluating the structure and the strategic capability of the manager is essential. Sentinel stands apart by combining the stability of the unlisted structure with a signature counter-cyclical philosophy. Instead of relying on passive market growth, we employ “active equity” management to acquire overlooked assets and manufacture value through strategic repositioning.

Vigilant Asset Selection and Management

The strategic utility of REIT investments lies not just in access, but in the quality of the covenant. A residential investment strategy typically involves gross leases with frequent vacancy risks and high management overheads.

In contrast, a Sentinel REIT provides access to a diversified real estate portfolio underpinned by “Triple Net” leases. In this structure, the tenant absorbs the outgoings, protecting the net yield for investors. Furthermore, the REIT structure enables the acquisition of “hard-to-replicate” assets, such as regional logistics hubs where supply is constrained. This scarcity value drives growth prospects and secures long-term cash flow.

Equity REITs: The Sentinel Edge

At Sentinel, we see equity-based investment vehicles as superior to other options such as mortgage-back securities. Where options like mortgage REITs invest in debt, our clients enjoy the tangible backing of bricks and mortar assets. Fundamentally, an equity REIT owns and operates the physical real estate. This allows us to retain control over the asset and actively manage the property to drive rental income directly from the tenant. This “active equity” approach is the only way to manufacture value independent of interest rate arbitrage.

Structure Matters: Listed vs Unlisted REITs

Understanding the structural divide between listed and unlisted markets is critical for making informed investment decisions.

Publicly traded REITs (often called Australian REITs or A-REITs) act as a proxy for the stock market. Because they trade on major stock exchanges like the ASX via a standard brokerage account, their value is driven by daily sentiment, liquidity flows, and global market trends. Consequently, REIT share prices often decouple from the underlying property fundamentals.

Conversely, unlisted REITs operate on a “mark-to-model” valuation basis, where the unit price is determined by periodic independent valuations of the physical assets. Therefore, they’re not subject to the vicissitudes of day-to-day share market swings or investor sentiment. At Sentinel, we champion this structure, which insulates our prime property market investments from short-term noise, preserving the integrity of the asset value and delivering a stable income stream derived from underlying utility, not speculation.

Key Advantages of Investing in REITs (Unlisted)

For investors seeking genuine portfolio diversification, unlisted trusts offer specific benefits that direct property ownership and exchange traded funds cannot match.

1. Access Assets Usually Reserved for Institutional Investors

Direct investors are often limited to residential property or lower-tier commercial property. Unlisted REITs aggregate capital to target assets with high barriers to entry. Whether it is a dominant regional shopping centre in Northern Australia or a logistics facility with strategic highway access, these property types attract national tenants. This provides lease covenants far stronger than a standard residential tenancy.

2. Passive Income via Professional Management

Real estate investing is complex. It requires navigating lease incentives, tenant retention, and capital expenditure cycles. In a REIT structure, active managers handle these elements. Our strategy emphasises aggressive leasing and value-add capital works to drive net operating income. This directly fuels investor distributions and potential capital gains.

3. True Portfolio Diversification

Holding a single real estate investment concentrates risk. A REIT disperses it across the broader real estate market. A single unit in a Sentinel trust provides exposure to a diversified portfolio spread across varying geographies and sectors. This blunts the impact of a localised downturn. Furthermore, unlisted property has a low correlation to the stock market. It acts as a genuine portfolio ballast when equities are volatile compared to other investments.

Maintaining a Long-Term View for Better Outcomes

A-REITs offer immediate liquidity but demand a “liquidity premium” in the form of volatility. REITs tend to perform differently based on this structure.

Unlisted REITs trade immediate liquidity for stability and performance. By committing capital for the fixed life of the trust (or a defined term), investors allow the manager to execute a long-term strategy without being forced to sell shares or assets cheaply to fund redemptions during a market dip. This alignment of capital allows for strategic repositioning that maximises value upon exit.

Navigating Risks and Market Volatility

Sophisticated investors understand that all yield carries risk. The goal is to mitigate it through structure and strategy.

Interest Rates and Yield Spreads

The relationship between interest rates and commercial real estate is nuanced. Even when interest rates rise, increasing the cost of debt, commercial property often acts as an inflation hedge due to robust job growth and CPI-linked leases.

• Inflation Hedging: In an inflationary environment, rent rises in step with costs, protecting the real value of the yield.
• Yield Compression: Conversely, when interest rates fall, the spread between property yields and the “risk-free” rate widens. This often drives capital values higher.
• Liquidity Constraints: Unlisted funds are illiquid for the investment term. This is a deliberate structural feature to protect asset value, but it requires investors to ensure their investment goals align with a medium-to-long-term horizon.

Tax Advantages of REITs

The trust structure is designed for high tax efficiency, passing pre-tax income directly to the investor rather than taxing earnings at the corporate level first. Crucially, unlisted trusts often enhance this through a “tax-deferred” component, where non-cash deductions, such as depreciation on plant and equipment, shelter a portion of the dividend income (distributions) from immediate tax. Unlike qualified dividends or ordinary income, this mechanism effectively lowers the cost base of the investment rather than adding to your current taxable income, offering a distinct advantage when managing the tax consequences of a high-yield portfolio.

Ready to Unlock the Benefits of Commercial Real Estate Investment Trusts (REITs)?

Are REITs a good investment? The answer depends on your objective. For those seeking a liquid trading instrument, the ASX offers options. However, for investors prioritising income stability, capital preservation, and access to unique commercial real estate opportunities with long-term yield potential, the unlisted trust is the superior vehicle.

Sentinel Property Group identifies and acquires income-producing real estate assets where active management can unlock value. By mitigating fluctuating public market conditions, we focus entirely on the performance of the property. Sophisticated investors interested in dependable, above-market monthly returns over the long term can request an information pack via the link below or review our current investment opportunities.

Disclaimer: This article is provided for general information only and should not be taken as financial advice. We recommend speaking with a licensed financial adviser to determine whether any investment strategy is appropriate for your individual circumstances.