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Direct vs listed property investing

Feb. 29, 2024
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Finsesh
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Finsesh

Exploring direct with indirect property exposure and which one is best suited for you.

 

Direct vs listed property investing

Having trouble choosing a property investment? When it comes to investing in property there are many choices for investors, and making the choice can be tough for some. This article will try to assist you in finding a solution that fits your investment needs. 

A broad split between property investing is direct investing vs listed property investing. We will look at the pros and cons of both options and discuss which options will suit you better when making investing decisions.


 

How to invest in property?

Investing directly means the investor gets their finances in order and they purchase a physical property, this property can be residential or commercial. It is the owners' responsibility to ensure the property generates income and that all the expenses are covered. This form of ownership provides 100% of the returns but you carry 100% of the risks. The most popular type of direct investing is buy-to-let investing, where investors purchase a property intending to rent it out to tenants. This form of investing can become an admin burden if you do all the work yourself. Investors can also look abroad to expand their property portfolio with offshore properties, but it is a very costly option for the average investor.

The alternative to getting exposure to direct properties is to buy shares of a listed property company commonly known as a Real Estate Investment Trust (REIT) These are companies that generate income from trading, owning, and developing properties. As you will notice all the work is done on your behalf by professional property managers. This form gives the investors access to a range of real estate which can potentially increase return and provides diversification. Due to the quick trading nature of stocks, your capital is much more liquid compared to direct investing.  


 

Long-term growth in the REIT sector

Before we get to the pros and cons of direct vs listed property investing, let's look at the long-term growth of the REIT sector 

The REIT sector has historically been the darling of S.A investors. Being a relatively small sector compared to the JSE, the REIT sector showed phenomenal growth until a 37.8% decline in 2020 hit this market. The sector was trading above its net asset value (NAV) and recovered accordingly.  In the last 5 years the performance of the SA REITs index was: 

2022 Year to date (End September): -12.5%, 2021: 41.5%, 2020: -37.8%, 2019: -2.6%, 2018: - 20.7

The last 10-year performance of the S.A REITs sector is 3.13% annualised and taking inflation into account your real return would have been -3.13%. It looks bad as the 2020 recovery is a big part of it. 

The long-term rate of residential property growth in S.A according to ABSA is 1.9% growth above inflation. There will be pockets of value throughout the country, but as an average growth rate, this is not great. The real returns will come from the careful use of leverage. 


 

Direct property investing

Pros

1. Control: You own and control the propertys rent, operational cost, and debt. Having control over your investment means you control the value of your investment.

2. Leverage: Having control over the property means you can manage the debt (leverage) to your advantage. Reduce debt to receive more income, but increase tax liability and vice versa. Using the bank's money to buy your asset increases your return on investment (ROI) dramatically. 

3. Property as your bank: Banks see direct property as more stable than listed entities and hence will provide you with easier debt. This debt can be used for other income-generating assets. 

Cons

1. Diversification: Having one rental property means your risk is concentrated. This can be overcome by planning for contingencies and ensuring your research is properly done before buying the property. 

2. Costs: Investing in direct property has extra costs involved like bond registration costs, lawyers, levies, rates, maintenance, etc. If not all costs are taken into account you can end up with a bad investment. Listed entities have the same problem but are professionally managed.  

3. Liquidity: If you need cash, it will take months for you to sell the property and wait for a transfer until you receive your cash. 


 

Listed property investing

Pros

1.  Access to superior opportunities in the property sector that would not have been accessible to a single investor such as retail centers and storage units. You buy into a share of these opportunities. 

2. Diversification: The investors buy into multiple properties hence spreading the risk if one of the properties fails. More diversification does not necessarily lead to better results. 

3. Liquidity: Stocks can be sold instantly which makes for much better liquidity than waiting months for your cash from a direct property investment. 

Cons

1. No control: Investing in stocks means you have zero control over the outcome of your investment as it's in the hands of REIT companies. 

2. Leverage: Banks don't lend against property share portfolios hence your return will only be linked to the amount of money you invest. 

3. Choices: There are plenty of options when it comes to listed companies and REITs. Choosing a good option is difficult without the help of a professional. Buying the index will assist you in receiving market returns. 


 

Different investors have different needs 

Everyone is unique and just as unique when it comes to investment styles. When investing in property, doing your research and knowing yourself as an investor will go a long way in choosing the right option for you. Risk-loving investors might leverage themselves to the maximum and buy as many properties with the bank's money, and use agents to manage the properties for them. Other people had bad experiences with direct property and would choose to invest in the SA REIT index. Some people have lots of money to invest, then the index is not a bad option either as you are getting your yield on a big investment amount and you don't need to leverage your money as much anymore. Property investing with little money is only possible by using the bank's money to purchase your investment property.  


 

In summary

People make investment choices based on their beliefs. Ensure that you are not biased when looking at property investment options and do your research before investing at all. Ensure you have a strategy in place for entering and exiting your investment and take action accordingly. 

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