What is the primary risk associated with investing in REITs?

The primary risk associated with investing in Real Estate Investment Trusts (REITs) is market risk, which encompasses fluctuations in property values. This risk can arise from various factors, including changes in the economy, interest rates, and supply and demand dynamics in the real estate market. When the economy slows down or interest rates rise, property values can decline, negatively impacting the performance of REITs.

Since REITs primarily derive their income from rents and property sales, any decrease in property values can lead to reduced rental income and lower asset valuations, ultimately affecting the overall return on investment for shareholders. Understanding market risk is crucial for investors because it can affect not only the value of the REIT but also the dividends paid out to investors, highlighting the interconnectedness of property values and investor returns within the real estate sector.