A real estate investment trust, known widely by its acronym, REIT, is an entity that invests in and manages property on behalf of its investors. It provides a way to invest in property without owning it directly.
REITs are relatively new to South Africa, but they have existed in other countries for decades. They were created by legislation in the United States in 1960 to enable the average investor to invest in a portfolio of commercial properties in the same way that they could buy shares in a company. These entities flourished worldwide as more countries adopted REIT legislation – according to the US website Nareit, more than 40 countries and regions have REITs, and a total of 940 listed REITs with a combined equity market capitalisation of about $2 trillion operate around the world.
REITs in South Africa
In 2013, South Africa came into line with global investment trends by enabling the conversion into REITs of older types of property investment firms: property loan stock companies (PLSs) and property unit trusts (PUTs). Two types of REITs took their place:
1. Company REITs. These replaced the old PLSs and have the legal structure of a company, but are subject to the REIT provisions.
2. Trust REITs. These replaced PUTs and fall under the Collective Investment Schemes Control Act, which governs unit trust funds and exchange traded funds. They have a trust structure, with a trust deed and trustees. Instead of buying shares, investors buy units, as in a unit trust. Note that these entities should not be confused with unit trust funds in the SA Real Estate General subcategory that invest in REITs and other property stocks.
To qualify as a REIT, the entity must, among other things:
• Distribute at least 90% of the company’s taxable income to its investors.
• Have at least 75% of assets allocated to real estate.
• Receive at least 75% of its gross income from rents or mortgages.
• Have no more than 25% invested in taxable REIT subsidiaries.
REITs are permitted to deduct dividends (distributions) paid to their investors from their corporate taxable income, and there is no dividend withholding tax on the distributions they pay out. Instead, investors pay income tax on the distributions at their marginal income tax rate.
Attractions for investors
Because properties are typically occupied by tenants with long-term leases, and rental income goes largely to investors, REITs provide a reliable source of investment returns. Naeem Tilly, a member of the SA REIT Association Research Committee and portfolio manager and head of research at Sesfikile Capital, notes that returns from REITs tend to be more stable than those from shares, and they are more likely than bonds to offer protection from inflation.
“The predictability of real estate leases and rental income gives REITs a defensive edge, enabling more accurate earnings forecasts and lower share price volatility. Additionally, REIT dividends are protected from inflation, unlike many bonds, as asset values and rental rates often rise with inflation,” Tilly says.
Greg Rawlins, CEO of Reitway Global, a manager of funds investing in the global REIT market, says REITs are also attractive to investors for their diversification characteristics. “REITs have historically provided low correlation with other asset classes, higher risk-adjusted returns, and represent an investment in real, tangible assets,” he says.
Local and offshore markets
South African REITs are permitted to have offshore property holdings. Their portfolios tend to be generalised across property sectors and geographies. For example Growthpoint Properties, South Africa’s largest REIT, owns and manages a diversified portfolio of 541 property assets, locally and internationally. These include offices, shopping malls and industrial sites.
Globally, the REIT industry is becoming more specialised, with many offshore REITs focusing on niche sectors. This is positive for investors, Rawlins says, not only because these operations have management teams with specialist expertise, but because the sectors they are entering offer unique investment opportunities.
“For example, tower REITs, also known as cell-tower REITs or communication REITs, specialise in owning and operating communications infrastructure, such as cell towers and broadcast towers. The REITs typically lease space on their towers to cellphone service providers. Other areas of specialisation include student accommodation, healthcare facilities, self-storage, and data centres.” Rawlins says.
How to invest
You can invest in REITs and other listed property companies directly through a stockbroker or share trading platform, or in unit trust funds or exchange traded funds (ETFs) that specialise in listed property. Funds may be actively managed, with a portfolio of shares in the real estate sector on the JSE as well as possible offshore holdings, or passively managed, tracking an index such as the FTSE/JSE Listed Property Index locally or the S&P Global Property 40 Index and S&P Global Reit Index globally.
* Hesse is the former editor of Personal Finance.
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