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Cape Town - Real estate has for years formed the backbone of many South African investment portfolios. South Africans can invest in property through various channels.
The channel most South Africans use is that of private debt funding. With private debt funding, investors will approach a bank for a mortgage which will be used to purchase the desired property.
Other forms of private real estate investing include buying a property outright, joint ventures, real estate partnerships or any other type of funding scheme. Buying private property are not without risk. One of the biggest risks with private property is the lack of liquidity. Getting in and out of private property is a very slow and expensive process.
Investors looking to invest in property with more liquidity should consider Real Estate Investment Trusts (REITs). These are publicly listed property companies that manage property on behalf of their shareholders. These shares trade on listed exchanges and trade hands daily.
Qualifying as a REIT
For a company to qualify as a REIT, the following rules and regulations applies:
- The company must own property in excess of R300m;
- Debt must be below 60% of its gross asset value;
- 75% of all income must come from rentals; and
- 75% of all earnings must be distributed to shareholders each year.
Tax implications
One of the biggest tax advantages to REITs is that they are exempt from any Capital Gains Tax (CGT) liability in respect of the disposal of property. The CGT liability is passed on to shareholders. When shareholders sell their shares at a profit, CGT will be liable.
REITS do not distribute dividends but rather distributions. When REITs distribute 75% or more of their earnings in distributions, they are exempt from paying any taxes on those earnings. As with CGT, shareholders are liable for taxes on distributions. Shareholders will be taxed at their personal income tax rate.
Advantages
As mentioned, the liquidity of a REIT is probably the biggest advantage over private property investments.
Other advantages for the investor include:
- No need for debt capital;
- Minimal transaction costs;
- No property management;
- Diversification (exposure to more than one property); and
- Low unit value.
REITs on the JSE
South African investors are spoilt for choice when it comes to REITs listed on the JSE. With access to over 30 REITs, investors have a wide array of options. These REITs specialise in various types of property such as residential, commercial, office space, storage, warehousing etc. Investors also have access to global property with REITs growing their offshore exposure.
At yields ranging between 6% and 10%, the listed property sector has been one of the top 3 best performing asset classes every year since 2005, bar 2008 and 2013.
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*Kirk Swart is an analyst at Overberg Asset Management, an Authorised Financial Services Provider (No 783) which specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: The above article does not constitute financial advice and is not a recommendation. Investors must always seek the advice of professionals and trade with caution. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
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