In the last few years property investing has become very popular. There are property stokvels and property investment clubs popping up from every corner of South Africa. Young professionals are taking their shot at property and prefer doing it collectively in order to limit individual risk and improve their chances of securing a bond. But what if you do not have a group or the income to afford a bond but still want to be in the property space,
What can you do?
There is an answer to that question...
REITS aka Real Estate Investment Trusts are the answer.
What is a REIT?
"A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. REITS own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers and hotels" - Our friend, Wikipedia.
Most of us have walked into a mall or shopping center and saw the words "something-something Property Fund" somewhere on the wall. That is the REIT letting you know who owns the building and who is most likely collecting the rent, plus the seal just adds some bragging swag for the company.
In South Africa we have plenty of REITS, I will name a few you probably know...
Delta Property Fund.. go to a few government buildings and you will know these guys, there is even the Delta building in Durban on Aton Lambede Street and another Delta building on west street(Dr Pixley KaSeme) also in Durban.
Growthpoint .. visit some trendy shopping complexes such as the V&A Waterfront and you will know these guys
Stor-age.. as the name suggests, these guys deal with storage space which is something South Africans are using more and more instead of their garages.
That is just a few names, there are plenty more to look up that are listed on the local market aka the Johannesburg Stock Exchange.
Continuing with the definition... REITS are special tax vehicles in the sense that tax is deducted at the end receiver of income thus REITS pay no income tax and you the shareholder pay a normal dividend tax. Ordinarily a company would pay income tax and then shareholders when a dividend is payed out would be charged a dividend tax, that is technically two taxes on the same money. REITS avoid all of this but in exchange for this special treatment they must earn a large majority of their income from property/real estate related activities (especially rental income) and must distribute a large portion of their earnings to shareholders. This can range between 75% to 95% of the post expense income depending on the country the REITS operates in. This is great for shareholders as every year REITS collect rent and distribute that income to shareholders. Meaning if you become a shareholder you can be set up for a lovely pay day... but there are risks involved. Let us look at the South African reit market and how you can use REITS to invest in property.
“The South African property sector was the worst performing sector on the JSE in 2018, the SAPY has lost over 25% of its value since 2018.”
The REIT terrain has been challenging...
The SA Listed Property Index comprises the top 20 liquid companies in the property space so be aware that its not a full presentation of all the REITS however is a good indicator to use to gauge their performance. If you invested in some REITS in 2018, you probably have lost close to 40% of the value of your investment and in some cases you've lost 60% to 90% (Think Rebosis Property Fund), yeah sure you would have earned some lovely dividends but the investment capital would have decreased in value by a bit. So basically its been a difficult time in the past few years for listed property.
A large portion of South African REITs are involved in the retail shopping space such as malls, shopping centers and office space. These type of property holdings have a huge reliance on the state of the local economy. The correlation is simple, when the economy decreases in performance less people have money to spend which negatively affects companies and companies are the tenants of retail shopping spaces and office parks.
Companies eventually struggle to pay rent and so leave the premises or an increase in rent becomes impossible thus keeping returns above inflation becomes difficult.
I am sure in the news you've read about how Edcon (the owners of Edgars) had to be saved by a collection of institutions which included landlords slashing rent and in some cases Edcon left the building entirely. This situation had a negative impact on the REITS who own property where Edcon was a tenant.
Retail spaces are under threat from online shopping and a cultural shift from consumers moving away from typical "mall rat" experiences. Gone are the days where the mall was the place to be.
Want to watch a movie? catch it online.
Want to buy clothes? just visit Spree or Wish or Superbalist or any other online store
Want to get gadgets and stuff? just visit TakeAlot
Want to get food? just go to UberEats or MrD on your phone
I am sure you get my point, the world is changing and so is the way people are shopping.
Furthermore most of the REITS in South Africa borrowed a lot of money to build or purchase their properties and borrowing money to get an asset can be a double edged sword. Borrowing, technically called "gearing" or "leverage" , is the act of lending money to increase your capital thus enabling you to access a higher priced asset with a smaller initial amount. The problem is if the asset does not perform as expected you then struggle to manage debts. Failing to pay your debts as a property company can result in financial disaster just like it can with an individual who fails to pay their bond. Worse, too much debt might mean holding back on increasing dividends to shareholders which can hammer the share price. When the company ends up having a lot of debt it may also result in cutting down payments to shareholders which spooks investors. Thus the share price of the REIT can fall even below its net asset value. In South Africa this has been the fate of many REITS.
What other risks are there with investing in REITs?
1. Reits are traded on the stock market
Since REITS are traded on the stock market their value fluctuates like a stock and stock prices carry short term volatility that most people would not be able to handle. The share price of a REIT does not always represent its net asset value (NAV). Most of the time the share price is indicating how people are feeling about property, the market and other factors. Thus if short term value drops are not your thing its best you avoid REITS. Nothing can be scarier than buying shares worth R600 000 to pocket R70 000 in dividends but 12 months later have those shares valued at R400 000.
But Does that happen with all property investments?
Yes and No. Yes the value fluctuates and no because you never really check the value of your property daily and that is the stressful part with reits, being able to see the price of your asset every day can be scary or exciting depending on market conditions.
2. Reits can be affected by property prices
When the property market is not doing well in regards to property prices, REITS can lose value of their books. This means net asset value drops and thus the debt to equity ratio changes to a level that spooks investors or worse, the asset prices falling but debts staying the same negatively affects the REITS ability to manage and access its credit. This can be bad for business. At the moment, South African property prices are down and are affected by the negative sentiment that is caused by the policy talks of "expropriation without compensation". And in a stagnate economy who is buying property? so property prices are falling. We essentially have a strong renters market at the moment which is good residential REITS but not the others.
3. Interest Rates
REITS can be negatively affected by rising interest rates. When interest rates rise or are high, investors tend to move to fixed income assets such as bonds. This can negatively affect the share price of REITS as "big/smart money" is pulled out of them. Furthermore an increase in interest rates or high interest rates also increase the cost of credit, especially for serving property bonds. The risen cost of credit ends up chipping a bit at potential shareholder income which moves shareholders out of the REITS.
So Omega, with everything you have said, Should I still invest in REITS?
The key with any investment is to ask yourself if you are a suitable investor for that asset.
If you can tolerate all the risks associated with REITS then yes, you should still investment in them. Long term they are a good play to add value to your portfolio.
So how can you invest in REITS?
There are a few options available to would be REIT investors.
The first one is property focused mutual funds, followed by ETF's.
Here is a list of some of the local and international ETF's you can buy
iShares Dow Jones US Real Estate (ticker: IYR)
Vanguard REIT Index ETF (VNQ)
SPDR Dow Jones REIT (RWR)
iShares Cohen & Steers Realty (ICF).
1nvest Global REIT (ETFGRE)
CoreShares S&P Global Property ETF (GLPROP)
CoreShares South African Property Income ETF (CSPROP)
Satrix Property Portfolio ETF (STXPRO)
Investec Australia Property Fund (IAP)
These are just a few out of plenty that are available in the market. However choose wisely and make sure there is no overlap among your ETF selection in order to be well diversified.
You can also invest by buying shares in individual companies. Ensure that the company you invest in has a good assets, is not over leverage with a lot of debt and monitor its history of paying dividends consistently. Be mindful of potential dividend traps so you do not lose your initial capital. Here are a few local and international REITS:
Accelerate Property Fund (APF)
Simon Property Group (SPG) -international
Public Storage (PSA) -international
Equity Residential (EQR) -international
HCP (HCP) -international
Ventas (VTR) -international
Indluplace Properties Limited (ILU)
Vukile Property Fund Limited (VKE)
Stor-Age Property REIT Limited (SSS)
These are just a few, there are thousands in the market in various countries and regions.
Simply open a brokerage account. For the local ones I recommend you use Easy Equities and for the international ones I recommend you use IBKR or any other brokerage that enables you to buy international equities.
One more thing...
REITS can play a healthy role in a well balanced risk adjusted portfolio. The trick is to remember all the risks and not be blinded by the potential gains. In this post I focused on the risks and historical risks in order to prevent people from just getting excited by the dividends and capital appreciation. Every investment has risks and benefits and if you can focus on limiting risks in your investment journey than the battle is half won. REITS will pay a good income to investors and long term their value will increase theoretically to match property prices but never treat a REIT like a fixed income asset, they are equities and must be viewed and treated as such.
Remember: Opinions expressed in this article do not and never will constitute financial advice. Every persons financial situation is different, I recommend you speak to a financial adviser about yours.
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