Very few people have the capital to own retail property outright but it is possible for ordinary investors to benefit from investing in this type of real estate through a real estate investment trust (REIT) that works in a similar way to a mutual fund.
These days there are REITs for every type of property you could think of from self-storage units to hospitals and resorts, and there is a particular subset that specializes in retail business space including freestanding stores, shopping centres and malls.
One of the main concerns is whether the economy is right for investing in a REIT, especially given the increasing popularity of online shopping and the recent increase in interest rates. In fact rising interest rates can have the largest effect on real estate valuations and economic activity. As borrowing gradually becomes more expensive, those investing in retail property have less to spend which in turn undermines property values. There’s also a likelihood that shoppers will have less to spend due to higher credit card rates and as a result some stores will see their income go down and may go under as a result and fewer new stores are likely to replace them. All these factors can hurt REIT rental income.
However that is just one theory and interest rates are likely to remain pretty low for the near future. According to the article in US News.com, one expert feels that the rate of economic growth has actually created what is being called “Goldilocks” conditions for retail REITs. This is where the economic situation isn’t as hot as to cause inflation but just as importantly it isn’t so cold as to cause a recession, creating conditions that are just right. The prolonged recession and slow recovery discouraged investment into retail construction and as a result the supply of good quality retail space is tight while the recovering economy has been strong enough to create sufficient demand for such space.
REITs work by collecting money from investors to buy real estate. They are governed by regulations that shelter the profits from taxes at the corporate level but to do this at least 90% of the income has to be passed on to shareholders. Where retail REITs are concerned, this is mainly rental income, although the properties may realize a profit when sold. These earnings or dividends are passed onto shareholders and are taxable at different rates depending on the source of the income.
According to the National Association of Real Estate Investment Trusts, there are currently about 30 retail REITs with around $200 billion of shares outstanding while overall there are 167 REITs worth in excess of $900 billion.