ARTICLE SOURCED BY DUANE NICHOLLS CFP®
What is a Reit?
Reit stands for a real-estate investment trust. It is a mechanism through which investors can access the physical property market without the hassles and costs of buying direct physical property.
Reits are companies, effectively listed on the Johannesburg Stock Exchange.
The business model of a Reit is fairly simple. We own a portfolio of properties. These could be shopping centres, industrial parks, office buildings, residential units, and collectively these generate rental income. Off that we pay expenses and these include rates and taxes, electricity, repairs and maintenance etc.
You are then left with a net property income amount. Off that you deduct the amount that it cost you to fund those assets. From a debt point of view, generally the Reit sector has approximately 35% debt & the balance is made up of equity.
Once you have subtracted the interest payments, you are left with a net property income amount. The figure is then distributed almost in its entirety to investors. Therefore, you as the original investor in a Reit, effectively shares in 100% of the net rental income that is generated off a property after having taken into account the financing costs.
This gives investors access to stakes in some of South Africa's most iconic properties on a liquid easily trade-able basis with very minimal transaction costs.
What do I need to know about investing in and trading in Reits?
These are listed on the JSE where you can get an idea as to what the yield is on a day-to-day basis by simply going to the print or to the websites of the various financial institutions.
So when you look at the shares, you will get an idea of what you can buy these shares at and that will be your distribution yield.
At the moment, the yields range anywhere between 6% and 10% and in the growth of that distribution, the average is about 8% at the moment.
In addition to that, as an investor you can also look forward to some form of capital growth on the value of the shares.
The big difference between investing in a Reit as opposed to any other investment, is that the Reits are easily trade-able. Your stock broker will trade them for you; or you trade them through your various stock broking websites.
However, it gives investors an opportunity to get out of their investments quick and easy, whereas with direct investments, generally the capacity to get out of the long-term property investment is just that - it is long term. So that is really an advantage for the day-to-day investor.
Can everyone invest in Reits and is it easy and safe?
Not every investor can invest in a mega-mall; for example the Waterfront, but through listed property such as Reits, one would have the opportunity to be able to get exposure to these wonderful assets, says Arrowhead Properties COO Mark Kaplan.
What one can do is to purchase these on the stock market, through online share trading or a broker. Further to that, it is very difficult to purchase a physical property. It is time consuming and the costs are very high. With listed property it is much easier to invest in them, it is safer to invest in them and the time and the liquidity that comes with the stock is much more favourable.
Investors put their money behind a management team that has the know-how to manage a portfolio of this size & what it brings is exposure to multiple assets rather than one individual asset. This also reduces the investor’s risk.
One also gets gearing. These funds are generally geared around 30% to 35% so the gearing is low and conservative, yet one is buying into a system where gearing is in place.
Other Benefits of a REIT
REIT’s give investors indirect exposure to a wide variety of expertly managed properties
• Regular income stream
REITs are supported by lease agreements which increase/grow on an annual basis
• Exposure to immovable property
Investors may gain exposure to immovable property with lower initial outlays
REITs are exempt from Capital Gains Tax (CGT) in respect of the disposal of the its immovable property, shares in another REIT or shares in a controlled property company REIT shareholder will only pay CGT when the REIT share is sold
Interest distributions by a REIT payable to South African resident investors are re-characterised as taxable dividends, but dividends withholding taxes will not apply. Where the recipient is a non-resident investor, the dividend will remain exempt from income tax
REITs are traded on the JSE and are considered more liquid than the physical properties
• Well Regulated
REITs, notwithstanding the JSE Listing Authority, are subject to the REIT legislation particular to the country which the company is incorporated, the Companies Act as well as their own Articles of Association or the Collective Investment Schemes Control Act
• Price Transparency
The share price of REITs is determined by market forces (demand & supply) & is visible to the public