You might find yourself sitting on the couch browsing Superbalist’s sale section and eventually buying those shoes that have been on your wish list for months. This minor act triggers a series of events that impact several industries, including the property sector.
With the emergence of the COVID-19 virus and its safety regulations, individuals were bound to their homes and encouraged to practice social distancing. This largely benefitted e-commerce and the real estate investment trusts (REITs) that are vital to this ecosystem.
REITs are companies that own income-producing real estate or property within a wide scope of sectors. There are a number of prerequisites for a company to qualify as a REIT; for instance, a REIT must invest at least 75% of its assets in property and therefore generate three-quarters of its total gross income from these assets. These companies must also pay at least 90% of their taxable income in dividends to shareholders. The majority of REITs are traded on stock exchanges and could offer benefits to investors in the form of income payments and capital appreciation.
As depicted in the diagram above, once your purchase has been placed, a Cell Tower sends this instruction to a Data Centre that processes the order. The processed order is then fulfilled at a warehouse, where it is then dispatched for delivery to your home.
Let’s briefly expand on the REITs involved in the value chain above.
- Infrastructure REITs
When you think of property, we generally picture a house, shopping centre, or an office block, not a cell tower. But, infrastructure REITs generate income through various property categories such as fibre infrastructure, energy pipelines, and telecommunications towers. These are the cell towers that received your online purchase instruction earlier in the e-commerce value chain.
Due to the simplicity and size of these structures, infrastructure REITs can quickly build these towers to meet the increasing demand and spectrum advancements we are likely to experience in the near future.
The illustration below depicts the expected growth in the 5G market between 2020 – 2026:
Source: Allied Market Research
A single tower can accommodate many tenants, and lease agreements typically run for up to ten years. The rental is generally linked to inflation with historically high renewal rates; therefore, predictable cash flows can be expected. Furthermore, competition has a significant barrier to entry due to the zoning regulations involved.
Tenants for these REITs companies include broadband providers, wireless carriers and government agencies.
- Data Center REITs
A data center looks like an ordinary building from the outside; however, the highly secure and environmentally controlled interior houses a collection of optical cables and equipment racks with an uninterrupted energy supply. Some of these buildings use as much electricity as a small town.
Data centres provide essential support to the digital economy of today. Whether its’s cloud storage/computing, video streaming, connecting employees virtually or processing online transactions.
The tenants rent “space/racks” that contain the hardware necessary to deliver digital services and content to its users. Recently, growth drivers for these REITs include the pick-up in e-commerce sales, digital services, and IT infrastructure outsourcing.
Rent is usually based on the amount of electricity the tenant will consume per square foot, with yearly increases tied to inflation. These contracts generally run for multiple years with high retention rates, resulting in stable cash flows.
Barries to entry are high as the complexity of the infrastructure required inside the building – generators, cooling systems, security, raised flooring – is extremely costly.
Tenants for these REITs include companies that provide cloud, internet, financial and communication services.
- Industrial REITs
Industrial REITs own and manage warehouse and distribution facilities. These properties house the inventories that are ultimately delivered to the end consumer.
These properties have short construction times due to less-complex building requirements. The construction of these properties is commonly near transportation hubs and densely populated areas. This allows their tenants to deliver parcels quicker and at a lower cost.
Industrial REITs play an essential role in modernising the supply chain and accommodating the rising demand for consumption via online shopping.
Is E-tail the new normal? The sudden shift has rendered some traditional retail outfits obsolete; here is a comparison of the largest retailers by market cap, with the largest being Amazon an online retailer:
Lease terms generally range from five to fifteen years, depending on the location of the warehouse. Tenants for Industrial REITs include online retailers, logistics businesses, traditional retailers and manufacturing companies.
In closing, these tech-related REITs in the heart of the e-commerce value chain offer attractive opportunities, profiting from the rise of e-commerce, digital services and the need for quicker delivery times.