By Pritu Makan
Niche REITs boast distinct and innovative strategies, providing investors with some of the most unique and robust real estate investment options with the potential to generate significant returns. Among some of the broader Niche REIT groupings the FTSE/Nareit Specialty REITs Index was the best-performing sector of the 13 public equity REIT property sectors on a year-to-date total return basis till 22 November 2024, with a total return of 49.2%. This was followed by the Health Care Properties Index (+34.2%) and Data Centre Index (+27.8%). In comparison, the broad FTSE Nareit All Equity REITs Index achieved a total return of 12.1% over the same period, while the Self Storage Index matched the broader index.
Most of these Niche REIT indices outperformed the broader property sector over a five-year period as well.
Some of the more popular sectors of niche REITs are:
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Self-Storage REITs are highly specialised property funds focused on the fast-growing self-storage sector, a niche sub-sector of the broader commercial property market. These REITs usually develop, own, and manage storage facilities and collect rent from customers (typically individuals and businesses), creating an attractive income stream from a portfolio of "much needed" self-storage properties with potential for income and capital growth through increasing rentals and occupancy levels, expanding existing properties and acquiring additional self-storage properties.
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Data centre REITs own and manage highly specialised facilities that house critical IT infrastructure that powers today's digital economy. A wide variety of companies, including Amazon, Apple, AT&T, Google, IBM, Meta, Microsoft, Oracle, and Ubisoft, utilise these REIT-owned data centres to house servers and networking equipment to store and access data. As the growing demand for online services and remote cloud storage grows, more and more opportunities are emerging for investors in this sector. In particular, expanding artificial intelligence and internet-of-things (IoT) services should contribute to increased demand for data centre services. Expanding 5G services has also prompted increased growth in the data centre and processing industries.
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Specialty REITs offer exposure to other unique assets in the property space, which are not typically known of among investors. These include movie theatres, experiential properties, land leases, farmland, and outdoor advertising sites. These funds have recently seen a solid outperformance compared to traditional REITs and other niche sectors amid the recent recovery in the property space (post Covid-19) and general economic prospects which also remain supportive of future growth potential.
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Healthcare REITs invest in various healthcare-related properties such as hospitals, medical centres, GP surgeries, senior housing facilities, skilled nursing homes and assisted living communities. The demand for these healthcare facilities tends to be relatively stable, driven by the aging population and growing healthcare needs. These properties usually have long-term leases and boast secure long-term cash flows.
Additional types of niche REITs include hospitality and hotel REITs, infrastructure REITs and hyper specialised REITs like those who invest exclusively in a specific micro-segment of the property market.
Interestingly, many existing large-cap REITs with diversified portfolios have also dedicated a certain portion of funds towards niche sectors with strong fundamentals to create new income streams. Growthpoint, the largest South African primary JSE-listed REIT with a quality portfolio of 511 properties (diversified across the retail, office, logistics and industrial, and trading and development sectors), is among these companies. Its alternative real estate co-investment funds management business, Growthpoint Investment Partners (GIP), currently makes up ~3.1% of its total property assets, with gross assets under management amounting to R18 billion.
GIP has three unlisted investments in specialist alternative real estate asset classes:
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Growthpoint Healthcare Property Holdings (GHPH) invests exclusively in healthcare property assets in South Africa with a mandate to acquire and develop acute, day and specialist hospitals, as well as laboratories and biotechnology manufacturing and warehousing facilities. The healthcare-focused REIT has nine assets which includes seven hospitals, a medical chamber and a pharmaceutical warehousing and distribution facility. These assets enjoy long leases and are considered long-standing landmarks in their communities.
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Growthpoint Student Accommodation Holdings (GSAH) is a purpose-built student accommodation REIT. The student residence platform, which is called "Thrive Student Living", features well-located, modern properties, with additional projects in the pipeline.
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Lango Real Estate offers a quality portfolio of income-producing assets and has, since its launch in 2018, positioned itself as an emerging leader in the African real estate market. Lango is focused on generating compelling and sustainable returns through the acquisition of prime commercial real estate assets in key gateway cities across the African continent. The business has since demonstrated significant growth and is emerging as a leader in the asset class in Africa, with assets on its balance sheet diversified across four countries in Africa valued in excess of $600 million.
How do niche REITs work?
Most niche REITs operate in the same general manner as standard property REITs (i.e. these companies purchase property and lease it to tenants, who then make rental payments to the REIT). The primary source of income is derived from the rental payments received from tenants using their properties. For example, a healthcare REIT would earn income from healthcare providers leasing medical facilities, while a self-storage REIT would generate revenue from those renting out space. The REIT collects these payments in exchange for maintaining and managing the space, which are then paid out to investors as dividends.
The key difference is that the specific segments of focus will have slightly different market dynamics to traditional REITs - they can either be more defensive (like self-storage and healthcare property), or high growth (like data centres), or uncorrelated (like the specialty segment).
Advantages of investing in Niche REITs
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The potential for higher returns: Specialty REITs such as student housing and cell towers tend to be more resilient and are generally recession-proof given the high demand regardless of the macroeconomic backdrop.
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Unique and uncorrelated portfolios: These funds own and manage a distinctive set of properties, providing investors with enhanced diversification benefits. For example, several new and emerging specialty REITs such as cannabis facilities have been gaining traction as state governments take active steps to legalise marijuana.
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Focused exposure: Niche REITs provide investors with an opportunity to gain exposure to targeted real estate sectors which could offer enhanced growth prospects.
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Reliable dividends: Many niche REITs focus on sectors with stable demand and predictable cash-flows, such as healthcare facilities, which can lead to consistent rental income. This makes some niche REIT segments attractive for income-focused investors looking for regular dividends.
Risks of investing in Niche REITs
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Oversupply issues: Certain niche REITs, such as student accommodation, can face high levels of competition which could lead to significant vacancies and lower profit margins, ultimately eroding dividend payments and future growth prospects.
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High operating costs: Most niche REITs (such as senior housing facilities, data centres, cannabis manufacturing centres and prison systems) require significant capital investment and have high operating costs.
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Sector-specific risks: These funds are exposed to the risks inherent to their chosen sectors (e.g. regulatory changes may affect healthcare REITs, while data centre REITs could face challenges due to cyber security and physical security risks).
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Lack of diversification (concentration risks): Most niche REITs invest exclusively in a single sector or area of real estate, which generally makes them riskier investments due to a lack of diversification.
Popular names in the Niche REIT space
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Equinix: This data centre REIT is one of the world's largest digital infrastructure companies and has more than 10 000 customers and 468 000 total interconnections on its systems, with an excellent track record and robust growth figures.
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EPR Properties: One of the largest entertainment REITs, the company acquires and develops properties leased to entertainment and entertainment-related business operators generally under long-term triple net leases. With 352 properties (which includes 165 theatres, 60 eat & play properties, 25 attraction properties, ten ski properties, seven experiential lodging properties, 20 fitness & wellness properties, one gaming property, and three cultural properties around the US and Canada), the company's strategic focus has yielded superior results as well as consistent and strong cash dividend yields.
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Gladstone Land Corporation: Gladstone buys farm properties in the US and rents them to corporate farming operations and medium-sized independent farmers through triple net leases. The company owns about a dozen row crop properties in California and Florida, which total more than 1 600 acres. Gladstone also invests in farm-related properties, including storage facilities, processing plants, and distribution centres.
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Lamar Advertising Company: One of the largest outdoor advertising REITs in the US that offers a variety of billboard, interstate logo, transit, and airport advertising formats. The company maintains ~160 400 billboards in about 45 states and Canada. Lamar is also the largest providers of logo signs in the US, operating about two dozen privatised state logo sign contracts.
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CoreCivic Inc.: This REIT is one of the largest prison operators in the US and is also the largest owner of partnership correctional, detention, and residential re-entry facilities. Through its CoreCivic Safety segment (~90% of total sales), the company operates nearly 45 correctional and detention facilities, some 40 of which it owns, with a total design capacity of ~65 000 beds.
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Supermarket Income REIT: The fund owns and manages a unique and high-quality portfolio of omnichannel supermarkets. The sector is structurally supported by positive long-term growth in grocery sales, driven by inflation and population growth. The group invests in stores that are deemed critical to the operations of leading grocers. These stores have long leases and are in strategic locations with attractive site sizes.
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Assura (JSE-listed): One of the UK's leading diversified healthcare REITs that has more than more than 600 healthcare buildings from which over six million patients are served. As at September 2024, Assura's portfolio was valued at £3.2 billion and it has a strong track record of growing financial returns and dividends.
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Primary Health Properties (JSE-listed): Also based in the UK, the fund invests in modern primary healthcare facilities with a portfolio that currently has 514 primary healthcare facilities valued at ~£2.8 billion. A large portion of the healthcare facilities are GP surgeries, with other properties let to National Health Service (NHS) organisations, Ireland's national health service provider - the Health Service Executive (HSE) - as well as pharmacies and dentists.
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Stor-Age (JSE-listed): The leading and largest self-storage property fund and brand in South Africa, Stor-Age is a fully-integrated and internally-managed REIT. The fund develops, acquires, and manages high profile self-storage properties and services more than 52 800 tenants across its portfolio of 1 071 properties, with 11 additional properties in the development pipeline. The South African portfolio comprises 63 self-storage properties totalling ~429 300 m2 of gross lettable area (GLA). In the UK, Stor-Age owns Storage King (the fifth largest UK self-storage brand) comprising 44 self-storage properties with ~179 100 m2 of GLA.
Valuation considerations
Niche REITs offer an interesting opportunity for investors who seek to gain exposure to unique or dedicated sub-sectors within the typical property space. This allows for the potential to generate significant gains or diversification benefits. In addition, those with steady and predictable cash flows also provide market participants with an interesting addition to their portfolio, particularly for income-focused investors.
The broader property market globally is trading at its long-term average valuation, while self-storage is trading at a slight discount and data centre, specialty and healthcare are trading at substantial premiums. This means that the wider niche indices are not looking particularly cheap currently. This, does not, however, mean that there is not opportunity in specific names - it just means that you will have to look more closely to find value currently. Alternatively, you can place some of the stocks or index ETFs on your watch-list and consider investing once these offer better value.
