Real Estate Investment Trusts (REITs) have become a popular investment vehicle for investors looking to gain exposure to the real estate market. They offer the benefits of owning real estate without the high capital requirements and management responsibilities associated with direct real estate investments.
However, like all assets, investors want their REITs to increase in value over time. In this blog, we will discuss five strategies that REITs can employ to increase their value.
1. Improve occupancy rate and rental reversion
One of the most significant sources of income for REITs is rental revenue. A higher occupancy rate means more rental income. To improve occupancy rates, REITs can implement effective marketing strategies and tenant retention programs, as well as improve the overall tenant experience. Additionally, REITs can increase their rental revenue by revising rents regularly to market levels or higher. By improving occupancy rates and rental reversion, REITs can generate higher income and increase the value of their assets.
2. Asset enhancement initiatives (AEIs)
Asset enhancement initiatives (AEIs) involve upgrading, renovating, and repositioning properties to attract and retain tenants, increase rental rates, improve traffic flow and maximise property value. Examples include adding new amenities, upgrading building systems, enhancing common areas, and improving energy efficiency. By implementing AEIs, REITs can improve the physical condition and marketability of their properties, which can lead to higher occupancy rates, increased rental revenue, and higher asset values.
For example, the ELITE Commercial REIT MXNU has plans to invest £12.5 million over three years to improve the sustainability and energy efficiency of properties in its portfolio occupied by the UK's Department for Work and Pensions. The investment will include repairing, upgrading or replacing existing lighting, heating and cooling systems, insulation and solar panels. This initiative will enable the real estate investment trust to boost sustainability and energy efficiency in their occupied estate, as well as upgrade the properties' Energy Performance Certificate ratings.
3. Capital recycling
Capital recycling is a strategy that involves selling underperforming assets and reinvesting the proceeds in more profitable assets. This helps REITs optimise their portfolio and maximise returns on investment. Capital recycling can also help REITs diversify their portfolio and reduce risk by reallocating capital to different asset classes or geographical regions. By selling underperforming assets and reinvesting in more profitable assets, REITs can generate higher income and increase the value of their assets.
4. Property acquisition
By acquiring new properties in strategic locations and with favourable market conditions, REITs can increase their net operating income and cash flow, which can lead to higher dividends and a higher market value for the REIT. However, like all types of acquisitions, REITs must conduct thorough due diligence to ensure that the new properties have strong growth potential so that they can create long-term value for their shareholders. This is what we call DPU (distribution per unit) accretive.
DPU accretive is a term commonly used to describe a situation where an investment made by a REIT is expected to increase the amount of distributable income per unit, or distribution per unit, that the REIT can pay out to its shareholders.
In other words, when a REIT acquires new properties that are DPU accretive, it means that the investment is expected to generate additional income for the REIT, which can then be distributed to shareholders as dividends.
4. Effective management
Effective management is critical to the success of a REIT. Good management can help REITs maximise their returns, optimise costs, and increase the value of their assets. An effective management can identify and acquire new properties, set strategic capital allocation, establish appropriate compliance and risk management and negotiate favourable lease agreements, all of which can lead to higher occupancy rates, increased rental revenue, and higher asset values.
Bottom line
In conclusion, as an investor, you want the value of your assets to appreciate over time. For REITs, the strategies discussed above can help increase their value. By improving occupancy rates and rental reversion, implementing asset enhancement initiatives, recycling capital, acquiring properties, and employing effective management, REITs can optimise their portfolio, increase their net operating income, and create long-term value for their shareholders.