Which ASX REITs are a good investment in 2020 and beyond? The pandemic-proof industrial Goodman Group (ASX: GMG) is one such example
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ASX (REITs) real estate investment trusts have had a pretty interesting year, to say the least. Due to their unique structure, REITs have always been a popular investment, particularly for dividend income investors. Since REITs are not subject to corporate tax laws in the same way as other ASX companies, they are usually entitled to pass on their dividend distribution payments without paying tax (of course, this also means the distributions don’t usually come with franking credits).
What’s wrong with ASX REITs in 2020?
REITs work on a very simple premise – they are designed to return rental income to shareholders from the land that the company owns.
Most REITs fall into one (or more) of three buckets: residential, commercial and industrial. Residential REITs typically own apartments, retirement villages and other land that people live on or in. Commercial REITs tend to own office buildings, business parks or shopping centres. Industrial REITs fall more into a ‘warehouse’ categorisation and own distribution centres and the like.
So what’s the problem here? Well, think about the effects that the coronavirus pandemic has brought to the world. Two of the biggest trends to emerge this year have been a shift to working from home, and online shopping and e-commerce. Starting to see the problem now?
Yes, neither of these trends are good news for commercial REITs. If a company that was previously hiring out an entire office block now finds itself with half of its workforce working from home, is it really going to keep paying full price for a building it now only uses half of? Not for long, I’d wager.
It’s a similar story with shopping centres. Retail and shopping were already moving online before the pandemic, but the accelerator is now pushed to the floor. I’m not sure REITs like Scentre Group (ASX: SCG), which owns the Westfield branded malls in Australia and New Zealand, has an especially bright future ahead of it. And with residential evictions now on ice as well, I’m not sure the business case for residential REITs is too crash hot either (not that I don’t support the policy).
The only REITs I’m banking on…
That leaves industrial REITs, which is the group I would isolate from the others as the only REIT worth investing in in 2020. Industrial REITs are rare growth area. E-commerce is fuelled by warehousing and distribution centres. For example, industrial REIT Goodman Group (ASX: GMG) has recently inked a deal with online titan Amazon.com Inc (NASDAQ: AMZN) to house a fulfilment centre for 20 years. It already has a similar arrangement with Coles Group Ltd (ASX: COL). There’s something I’d be willing to invest in. BWP Trust (ASX: BWP) is another industrial REIT I would consider. It leases its warehouses to Wesfarmers Ltd (ASX: WES) for Wesfarmers’ Bunnings Warehouse chains.
When it comes to REITs, I think you need to ask yourself ‘what’s the future of this company’s assets’ before you commit to any of them. The game has changed for REITs in 2020, so you’d better make sure you know the new rules.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. The Motley Fool Australia has recommended Amazon. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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