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Property investing, the REIT way

June 19, 2024
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FinMeUp
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FinMeUp

REITs vs Physical property vs Stocks. All you need to know to make an informed decision.


What is a REIT?

A Real Estate Investment Trust (REIT) is a type of investment vehicle that allows investors to invest in real estate without the need to directly purchase or manage any property.

REITs typically own and operate income generating real estate assets such as office buildings, apartments, shopping malls and hotels. These assets are then managed by the REIT, which generates income through rent payments from tenants.

 

REITs as an income generating asset

REITs listed on the JSE are required by law to distribute at least 75% of their taxable earnings to shareholders in form of dividends. This allows investors to earn regular income from their investments in the form of dividends.

REITs are required by law to pay dividends at least once annually. However, many REITs pay out dividends quarterly or monthly.

REITs are also known for their potential to provide investors with long-term capital appreciation through appreciation of the underlying real estate assets.

 

REITs vs Physical Property investment

The common question arises among investors, why buy shares in a REIT when you can own your own property investment? 

The comfort of seeing your investment in a physical location is contrary to only owning shares in your digital wallet.


The Pros

  • REITs offer investors a way to invest in real estate without the need to directly purchase and manage a property. This can be a time-consuming and expensive process, especially for individual investors.
  • Reduce risk by spreading investments across multiple properties and locations. 
  • REITs are professionally managed, which means investors do not need to have expertise in real estate to benefit from their investment.
  • REITs are also highly liquid, which means that investors can easily convert their investments into cash. Whereas owning a physical property is not always that liquid and can take months to sell.

The Cons

  • REITs that trade on stock exchanges are required by law to distribute a large amount of their earnings to investors, in our case 75%. This leaves the REIT with little money to grow its business by buying more property. This may lead to weak growth.

 

Where can I buy a REIT or property fund?

REITs are traded on stock exchanges, just like other publicly traded companies. This means that investors can easily buy and sell shares of REITs through a brokerage account. 

In our case REITs can be traded on the JSE through your EasyEquities account or an authorized stockbroker.

Options:

  • Individual REITs, such as Growthpoint, Redefine, and Stor-Age. 
  • REIT ETFs, such as the Satrix Property Index Fund. 
  • Invest in individual property via EasyProperties

 

Historical performance of REITs vs Stocks 

Stocks: FTSE/JSE top 40, tracks the performance of the 40 largest companies, by market cap on the JSE.

  • 1 year: +3.8%
  • 3 years: +39.91%
  • 5 years: +34.78%
  • 10 years: +101.36

REITs: The FTSE/JSE SA Listed Property Index consists of the 20 largest shares listed on the JSE in the REITs sectors, with a primary listing on the JSE.

  • 1year: -6.25%
  • 3years: -27.61%
  • 5years: -50.32%
  • 10years: -36.33%

Note REITS typically have very high dividend yields compared to stocks. Even though share prices of REITS show negative growth, the cash flow (dividend) on these REITS will provide investors with a very solid passive income stream. 

REITs and stocks have different objectives and characteristics. Common stocks main objective is capital gain (share price appreciation) for investors and then income generation (if that stock pays dividends). REITs act as income generating investments and the focus is on the dividend yield provided by the REIT rather than the appreciation of the stock price.

Although the REIT sector has underperformed this may not be the case for all the individual REITs on the JSE. This is just a broad overview of REITs vs Stocks in South Africa. Other factors such as inflation, associated risk etc. must be taken into consideration before making an investment decision.

 

Highest market cap REITS 

Just a broad overlook of the largest REITs trading on the JSE

  • NEPI Rockcastle (JSE:NRP)

Operate and own retail properties (Shopping centers) in nine countries.

1Y Share price change: -0.28%

5Y Share price change: -38.95%

Div yield: 6.5%

 

  • Growthpoint Properties (JSE:GRT)

Operate and own properties in the retail, office, and industrial sectors.

Owns a 50% stake in the V&A Waterfront and a majority stake in the countrys first healthcare property fund

1Y Share price change: -0.67%

5Y Share price change: -44.68%

Div Yield: 8.7%

 

  • Redefine Properties (JSE:RDF)

Operate and own properties in South Africa and abroad. Investing in the retail, office and industrial sectors.

1Y Share price change: -2.54%

5Y Share price change: -59.62%

Div yield: 10.18%

 

Conclusion

Investing in REITs can provide investors with regular income through dividends, the potential for long-term capital appreciation, diversification, and professional management of their assets. 

These advantages make REITs an attractive option for investors who are looking to gain exposure to the real estate market without the need to buy a physical property. 

REITS have underperformed severely in recent times, but that does not mean that there are not a few great opportunities in the market. Stock pick to follow: Stor-Age.

 


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