A REIT, or Real Estate Investment Trust, is defined by SA-REIT as “a company that derives income from the ownership, trading, and development of income-producing real estate assets. In South Africa, a REIT receives special tax considerations and offers investors exposure to real estate through shares listed on the Johannesburg Stock Exchange (JSE).”
REITs are still the cheapest, easiest, fastest, and safest way for any investor to become involved in actively owning shares in property without directly owning or managing property. The entry cost is merely the price of a single share.
REITs have been around internationally for over 50 years but came into existence in South Africa in 2013 where they had to meet JSE listing requirements and agree to the listing requirements and rules. Similar previous investment vehicles like Property Unit Trusts (PUTs) and Property Loan Stock Companies (PLSs) could qualify automatically (PUTs),or adopt the new regulatory framework (PLSs).
Some of the JSE listing requirements:
- Own at least R300 million of property
- Keep its debt below 60% of its gross asset value
- Earn 75% of its income from rental or from property owned or investment income from indirect property ownership
- Have a committee to monitor risk
- Not enter into derivative instruments that are not in the ordinary course of business
- Pay at least 75% of its taxable earnings available for distribution to its investors each year. This way the investor pays tax on the dividends and not on the REIT. Distributions paid to investors are taxable at the individuals marginal tax rate when they include it in their taxable income.
No financial management models are imposed on how a REIT is managed internally of externally. Directors are responsible for ongoing compliance though.
The investments are supported by tenants committed to long term lease agreements that escalate each year at a predetermined rate allowing sustainable growth and predictable earnings.
REITs can also have exposure to international markets provided the country in which the property investments are held holds a rating of Baa2 or B222 by Moody’s or Fitch ratings respectively.
Investors can buy and sell shares at any time simultaneously providing liquidity to the real estate market without the high costs and time delays that go hand in hand with physical property ownership, and at a reduced risk because they are exposed to a diversified portfolio of properties including residential, commercial, industrial rental space and even hotels. Investors can however experience a certain degree of risk due to external social and economic factors which can be unpredictable and can positively or negatively affect rental income and the value of a REIT. For example the lockdown during the recent Covid pandemic affected commercial, retail and industrial tenants ability to pay rental and share prices were impacted severely accordingly.
Since then property share prices have started to claw their way back slowly and during April this year actually overtook equities as the best performing asset class. Experts predict it will take 3 to 5 years for REIT’s to climb back to pre-Covid levels though.
Click here to view a selection of JSE listed REITs in South Africa and their share prices live to within a few minutes
Sources: REIT-SA, The South Africa Institute of Taxation, Alphawealth, Moneyweb, The JSE