Understanding the expected trade off between potential capital appreciation and yield across classes of REITS.

Different classes of REITS
1.  Retail/Mall
2.  Office/Commercial
3.  Hospitality
4.  Industrial
5.  Health Care


Comparison of yield across various REITS
1 < 2 < 3 < 4 < 5

Comparison of Potential for Capital Appreciation across various REITS
1 > 2 > 3 > 4 > 5



Understanding the expected trade off between potential capital appreciation and yield across classes of REITS.

The retail or mall REITS tend to favour capital appreciation in the value of the underlying assets.

• Malls are hard to duplicate and scarce.  
• In an asset inflation situation, the underlying mall property would increase in value faster than other classes of REIT with the attendant appreciation in the price of the REIT share.  
• The trade off would be lower distribution yield.  
• Since malls REITS are highly demanded, the price of the REIT share often increases to such an extent to reduce the yield on the REIT.

On the other end, the health care REIT seems to give the highest yield but trades off its potential for capital appreciation.

• It is easy to conceive that a health care REIT will not have much capital appreciation in its assets if it has a 15 year fixed lease with an operator for its assets.  
• For example, in a particular such REIT, any increase in rent is undertaken only once and year and only at the same rate as the CPI to keep track with inflation.  Even if the asset increases in value substantially, the REIT will not receive any additional income for the increase since it has signed fixed long term leases with the operator.  As such capital appreciation is capped.  
• On the other side of the equation, the health care REIT is able to pay very consistent and high yields to the unit-holders.  
• Health care REITS are as close to being recession proof as any other class of REIT would allow (assuming the operator does not default).  
• Since health care is by its nature also less prone to cycles compared to offices or industrial business, health care REITS are well recommended in period of grave economic uncertainty.  

Ref:
Value Investing in REITS by Attlee Hue