As with all investment products, evaluating the risks of REITs is very important to affirm whether the product fits with your risk profile and your overall financial plan.
Risk Profile is the optimal level of investment risk and threats an individual and organization is willing to accept.
Financial Planning is complete evaluation of an investor’s current and future financial situation.
A major shortcoming with REITs is that the net asset value of a REIT unit solely depends on the value of the underlying real estate. Any slump in the prices of real estate would affect the value of this unit and conversely translate into losses for the individual. The homogeneous nature of REIT funds thus makes it a risky asset in contrast to mutual funds which invests in a variety of areas.
Some of the other major risks associated with REITs consist of:
Market Risk
REITS are traded through stocks exchange and the costs are subjected to demand and supply. Investors may receive less than the original investment amount if they are selling their units in a REIT. The costs reflects the investor’s self-assurance over many factors including the economy, the REIT management, the property market and its returns, the rate of interest and etc. As with other stocks, investors must stand such fluctuations in the prices.
Liquidity Risk
Though the investors enjoy the benefit of leaving their investments by selling it on the exchange, the real estate fund may be somewhat less liquid as compared to funds invested in other financial securities, such as stocks or bonds. The reason behind is unavailability of finding buyers and sellers for the property, especially if the price of the property has alleviated considerably
Legal Risk
There could be a number of legal risks including dispute on title of property, on-going litigation and unpaid dues.
