Optimal capital structure for a generic Australian Real Estate Investment Trust (A-REIT)

            It is important to understand that what Australian Real Estate Investment Trust (A-REIT) is before looking into its various related aspects such as high leverage or low leverage. In Australia, A-REIT is actually a trust of investment, which not only owns, but it also operates the portfolio of those properties, which have the capability to produce income. The good thing about A-REIT is that it has got its listings on Australian Stock Exchange. This trust allows investors to conveniently invest in different properties without going into any complex processes. The process is very simple that trust gathers the money from investors, and then a property is purchased, which is then managed by the trust to generate considerable amount of profits. The fact of the matter is that mostly income generated by this trust is achieved through renting the purchased property (GILMOUR ). It is a fact that to asses that how much debt has been incurred by A-REIT keeping its total assets in view, the most important tool is the gearing ratio, which explains the amount of debt. If ratio goes higher, then A-REIT will have to bear more debt, which means that with so much debt, the capability of A-REIT becomes limited to buy more assets for the future investments.

            It is important to understand the fact that trust like A-REIT has to maintain few things on a balance such as they have to come up with sufficient amount of liquidity as well as having enough investing profitability; these are important to handle the cost of their capital. If financial leverage is high, then they will have to incur more debt, which means that they will have to look for more cash from capital markets, which is not a good sign. It means that low financial leverage is the best thing for A-REIT because when leverage is low, the ratio of debt will also be low, and debt security will be in a good balance for the trust. The other negative point about going with high leverage is that when interest rates will increases, the interest expenses of the A-REIT will also rise, which is another bad indicator for their future performance. So, low leverage should be preferred by A-REIT, as it comes with fewer issues as compared to high leverage. My answer remains the same, even if A-REIT is a stapled security, because basics will remain the same (Chia)

References of Optimal capital structure for a generic Australian Real Estate Investment Trust

Chia, Jeremy . Why Looking For REITs With Low Leverage Is Important. 2017. 28 May 2019. <https://www.fool.sg/2017/12/04/why-looking-for-reits-with-low-leverage-is-important/>.

GILMOUR , EMMA . What is an Australian Real Estate Investment Trust (A-REIT)? 2019. 28 May 2019. <https://www.realcommercial.com.au/news/property-investment-reit>.