If you’ve ever dreamed of investing in a big shopping mall - it is possible to do this through a real estate investment trust (REIT). REITs (pronounced ‘reets’) are companies that own and often operate income-producing property, such as malls that allow people to satisfy their retail urges.
And it’s not just shopping malls that they invest in – REITs can also give you access to industrial parks, office blocks and residential buildings. In South Africa, REITs are listed on the Johannesburg Stock Exchange.
According to the SA REIT Association, they must have the following in order to qualify for a listing on the JSE:
- Own property of at least R300 million
- Keep debt below 60% of gross asset value
- Earn 75% of income from rental or from property owned, or from investment income from indirect property ownership
- Create a committee to monitor risk
- Pay at least 75% of taxable earnings available for distribution to its investors each year.
Benefits
There are plenty of advantages to investing in REITs:
Diversification: While they shouldn’t be the core part of your portfolio – REITS are often referred to as ‘good diversification tools’, meaning they provide a proper alternative to some more traditional stables of your investment portfolio such as shares, bonds or a typical savings account. By investing in REITs you could expose yourself to some of the best commercial properties (and the income they garner) in South Africa.
The best of both worlds: While they are listed, REITs have equity and bond-like characteristics. According to the SA REIT Association, they have a reoccurring cash distribution yield (much like a bond) as well as growth from income (much like equities do).
Relative surety: REITs are relatively sound as they are underpinned by lease agreements with tenants in property assets.
Easy access: Entry costs of a REIT investment is the price of a single share and they are very liquid, i.e. you can buy and sell REITs at any time. This is a major advantage, because if you invest in property directly it’s not as easy to buy and sell as you have a fixed asset that you have to maintain and live in yourself or find a tenant to occupy.
Downsides
While REITs are generally quite an attractive investment there are downsides to consider (just like with everything else):
REITs may not stay attractive forever: If interest rates rise they could make Treasury securities more attractive, drawing investors away from REITs and lowering their share price.
Taxes: You’ll have to pay tax on dividends and REITs must pay property taxes too. IF the government were to increase property taxes this could impact REIT investors.
Occupancy wanes: If managers are poor it could result in a reduction of tenants in buildings, which will hurt the REIT’s revenues and it turn the investors putting their money into the listed entity.
Property prices falling: Property prices don’t always go up. They can fall too and this could impact REITs as a result.
Investing in REITs
Ask your bank, stockbroker or financial advisor how you can go about investing in a REIT. While they are listed and deal in property, which some believe ‘can only go up in value’, it is still a relatively complex investment product and you need to be sure that it’s the right investment for you. If you are keen to invest in REITs you can do this through the following means:
- Open a stockbroking account
- Open an online securities account with a bank
- Indirectly – through fund that owns SA REIT shares
- Invest in a property unit trust fund
- Buy shares in a property index fund