Many years ago, a young friend of mine steadfastly refused to invest in REITs .

His logic was that REITs should be relegated to the preserve of older, income-focused investors who desire dividend income.

Being younger, his attention was fixated on companies that could grow over time to provide strong capital gains.

Of course, there’s nothing wrong with having a different investment philosophy.

However, he would have been surprised to know that REITs, especially the stronger ones, have provided a great mix of both capital gains and dividends over the years.

For example, Frasers Centrepoint Trust, or FCT, a retail-focused REIT that owns a portfolio of heartland malls, traded at $1.48 back in October 2010.

A decade later, its share price closed at $2.36 recently, for an absolute gain of 59 per cent.

However, over the last nine years, the total dividends that were paid out amounted to almost a dollar.

The total return inclusive of dividends, therefore, stands at 127 per cent, or around 8.5 per cent compounded annually.

Not too shabby for a REIT that is supposed to be purely an income stock.

Here are three reasons why REITs can provide growth in addition to dividends.

Growing industry

REITs that own properties within growing industries can enjoy a steady uplift in rental income.

As demand grows, tenants will be willing to accept higher rental rates to secure space within the REIT’s assets.

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This allows the REIT to report higher rental reversion, which translates into higher net property income and a higher distribution per unit (DPU).

One such example is the data centre industry, where demand for data has exploded due to the Covid-19 pandemic.

As more businesses digitalise and people switch to working from home, data traffic levels have increased significantly.

Keppel DC REIT is a beneficiary of this long-term trend as it owns 18 data centre assets located across eight countries.

Global mobile data traffic is expected to rise by 31per cent annually from now till 2025 and will underpin the REIT’s growth over the next five years.

Accretive acquisitions

Acquisitions are another way REITs can grow over time.

The important thing here is for REITs to engage in acquisitions that are accretive to DPU.

If the REIT is able to do so, the unitholder can enjoy an increase in DPU after factoring in any share dilution from the issuance of new units or a preferential offering.

Acquisitions may also help to diversify a REIT’s portfolio to more resilient sectors or help it to gain exposure to a new country to reduce geographic concentration risk.

For instance, Mapletree Industrial Trust announced the acquisition of a data centre last month to increase the REIT’s weight to this growing asset class to 41 per cent, from the current 38.5per cent.

FCT’s recent acquisition of five suburban malls through AsiaRetail Fund Limited is poised to increase the REIT’s DPU by 4.7 per cent based on the distribution made in the first nine months of the fiscal year 2020.

If done right, acquisitions are a great way for REITs to not just grow their asset base, but also their DPU over time.

Asset enhancement initiatives (AEI)

A third avenue for growth is asset enhancement initiatives or AEI.

AEI involves the improvement or refurbishment of an existing property to either increase its attractiveness to existing and potential tenants, or to increase the gross floor area to enable more space to be rented out.

Such initiatives contribute to the growth of the REIT’s rental income over time as they allow the manager to ask for a higher passing rent, or for the REIT to have additional space for leasing.

There have been recent examples of AEI conducted for industrial REITs such as AIMS APAC REIT and Ascendas REIT.

AIMS APAC REIT recently completed the AEI for its Optus Centre property by adding new access roads, a pedestrian link from the car park, and upgrades to existing bathrooms.

For NorthTech at Woodlands, AEI helped to increase this property’s value to $116.5 million as compared to $102 million before the AEI.

For Ascendas REIT, it commenced new AEIs for three of its properties for a total sum of $16.3 million.

Existing AEI on Aperia Mall and 52 and 53 Serangoon North Avenue 4 took up $9.7 million and are supposed to be completed by the third quarter of this year.