To be listed on the JSE in South Africa, a REIT must possess at least R300 million in property, have debt of less than 60% of its gross asset value, generate at least 75% of its income from real estate activities, and pass through at least 75% of its income to investors (90 percent in the US). The investor pays tax on the dividends rather than the REIT in this method.
Are REITs a good investment in South Africa?
Based on a compound annual growth rate, SA Real Estate Investment Trusts (REITs) made up a significant 11 percent of the Top 100 Companies over five years, and a REIT took the top spot for the first time.
“In South Africa, listed property continues to be the top performing asset class. Laurence Rapp, chairman of the SA REIT Association, states, “It has generated strong results above market expectations.” All listed South African REITs are members of the SA REIT Association, which represents the country’s listed REIT sector.
Despite the sluggish economy, income growth from SA REITs continues to surprise on the upside, and it remains the greatest asset class for increasing income streams. Even in a downturn, it provides predictable income and less erratic earnings growth.
“Any serious investor should regard meaningful exposure to listed property, as an asset class, as vital,” says Rapp, citing the sector’s widespread position among SA’s top listed investments and its strong performance track record. “REITs play a critical role in ensuring that South Africans have affordable access to property ownership and savings.”
Listed real estate investment trusts (REITs) have grown in importance in the South African economy. Today, REITs listed on the JSE account for 5.8% of the FTSE/JSE All Share Index, making them a larger sector than retailers, which account for 5.7 percent, and healthcare, which accounts for 3.9 percent. South African and non-South African JSE-listed REITs are included.
The market value of SA REITs has surged by roughly 43% in the last year, to around R340 billion. The listed property sector in South Africa has a tremendous impact on our economy and society. The JSE now has 33 SA REITs and three non-SA REITs listed. The entire market capitalization of the JSE REIT sector exceeds R455 billion.
According to Rapp, this sector’s expansion occurred during some of South Africa’s most difficult economic periods. Despite this, the REIT industry has carved out an exceptional growth trajectory, because to its defensive investing features, proven track record, and commitment to worldwide best practices.
How does a REIT work in South Africa?
All SA REITs own property that generates income. Investors can purchase and sell shares in SA REITs at any time, without the costs and delays that come with owning real property. Because investors are exposed to a diversified portfolio of properties, SA REITs provide a lower-risk property investing approach.
What is the minimum amount to invest in REITs?
REITs, like equity shares, are listed and traded on the stock exchange. As a result, if you want to invest in REITs in India, you’ll need a demat account.
- Previously, an investor had to spend a minimum of INR 50,000 in REIT units; however, this criterion has been removed, as per a notification issued by SEBI on July 30, 2021, for investing directly through stock exchanges. Initial public offerings (IPOs) and follow-on offers now have a lower minimum investment requirement of INR 10,000-15,000, down from INR 50,000 previously (FPOs).
- Another regulation change is the change in the lot size of REITs traded, which was previously set at 100 units. The minimum lot size has been reduced from 100 units to one unit as a result of the same SEBI regulation.
- There are three REITs that allow investors to invest in India at the moment. These are some of them:
How much does it cost to invest in REITs?
Private REITs, while they have many of the characteristics of a REIT, do not trade on a stock exchange and are not registered with the Securities and Exchange Commission in the United States (SEC). They aren’t required to give the same level of information to investors as a publicly traded firm because they aren’t registered. Institutional investors, such as major pension funds and accredited investors (those with a net worth of more than $1 million or an annual income of more than $200,000), are typically the only ones who buy private REITs.
According to NAREIT, the National Association of Real Estate Investment Trusts, private REITs may have an investment minimum ranging from $1,000 to $25,000 per unit.
Risk: Because private REITs are generally illiquid, getting your money when you need it can be challenging. Second, private REITs are exempt from corporate governance policies because they are not registered. That implies the management team can act in ways that demonstrate a conflict of interest with little to no oversight.
Last but not least, many private REITs are managed externally, which means they have a management that is paid to administer the REIT. External managers’ compensation is frequently based on the amount of money they manage, which presents a conflict of interest. The manager may be motivated to do things that increase his or her fees rather than what is best for you as an investment.
Non-traded REITs
Non-traded REITs are in the middle: they’re registered with the SEC like publicly listed firms, but they don’t trade on major exchanges like private REITs. This type of REIT is required to provide quarterly and year-end financial reports by law, and the filings are open to the public. Public non-listed REITs are another name for non-traded REITs.
Risk: Non-traded REITs can have high management costs, and they’re generally managed externally, similar to private REITs, posing a conflict of interest with your investment.
Furthermore, non-traded REITs, like private REITs, are typically relatively illiquid, making it difficult to get your money back if you suddenly need it. (Here are a few more points to keep in mind while investing in non-traded REITs.)
Publicly traded REIT stocks
This type of REIT is registered with the Securities and Exchange Commission (SEC) and trades on major stock markets, giving public investors the highest potential to profit from individual investments. Due to the nature of public corporations being subject to disclosure and investor supervision, publicly listed REITs are generally considered preferable to private and non-traded REITs in terms of management expenses and corporate governance.
Risk: REIT stock prices can fall, just like any other stock, especially if their specialized sub-sector falls out of favor, and sometimes for no apparent reason. There are also many of the hazards associated with investing in individual equities, such as poor management, poor business decisions, and large debt loads, the latter of which is particularly prevalent in REITs. (For more information on how to buy stocks, click here.)
Publicly traded REIT funds
A publicly listed REIT fund combines the benefits of publicly traded REITs with the added security of a mutual fund. REIT funds often provide exposure to the entire public REIT world, allowing you to buy one fund and own a stake in roughly 200 publicly traded REITs. Residential, commercial, lodging, towers, and other REIT sub-sectors are all represented in these funds.
Investors can benefit from the REIT model without the risk of individual stocks by purchasing a fund. As a result, they benefit from diversification’s ability to reduce risk while enhancing profits. Many investors like funds because they are safer, especially if they are new to investing.
Risk: While REIT funds largely mitigate the risk of a single firm, they do not eliminate dangers that are common to REITs as a whole. For REITs, rising interest rates, for example, raise the cost of borrowing. And if investors conclude that REITs are unsafe and would not pay such high prices for them, many of the sector’s equities could fall. In other words, unlike an S&P 500 index fund, a REIT fund is tightly diversified across industries.
REIT preferred stock
Preferred stock is a unique type of stock that works much like a bond rather than a stock. A preferred stock, like a bond, provides a regular cash dividend and has a fixed par value that can be redeemed. Preferred stock, like bonds, will fluctuate in response to interest rates, with higher rates resulting in a lower price and vice versa.
Preferred stock, on the other hand, does not receive a share of the company’s continuous profits, so it is unlikely to rise in value beyond the price at which it was issued. Unless the preferred stock was purchased at a discount to par value, an investor’s annual return is expected to be the dividend value. In contrast to a traditional REIT, where the stock can continue to appreciate over time, this is a big deal.
Risk: Preferred stock is less volatile than common stock, which means its value will not fluctuate as much as a common stock’s. However, if interest rates rise much, preferred stock, like bonds, will likely suffer.
Preferred stock is positioned above common stock (but below bonds) in the capital structure, requiring it to pay dividends before common stock, but only after the company’s bonds have been paid their interest. Preferred stock is often regarded as riskier than bonds, but less hazardous than common equities, due to its structure.
Do all REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Equity REITs engage mostly in commercial assets, such as shopping malls, hotel hotels, and office buildings, while mortgage REITs invest in portfolios of mortgages or mortgage-backed securities (MBSs) (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. To qualify as securities, REITs must release at least 90 percent of their net earnings to stockholders as dividends. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
How is REIT income taxed in South Africa?
- REITs can pay out a qualifying dividend without paying income tax within the firm, which is later taxed as taxable income in the hands of the investor. This permits all earnings to flow through to investors without the corporation paying income tax.
- Investors pay no tax if their assets are held in a retirement annuity, pension, provident, or preservation fund.
before they receive their pension payments for the funds, on dividends on REIT investments This is in contrast to normal corporate earnings, which are taxed at a rate of 28% within the company before a 20% dividend withholding tax is applied on dividends paid out to investors. The opportunity to reinvest and compound these before-tax distributions over a lengthy period of time in a vehicle like a pension fund is extremely beneficial to the pension fund member.
- A key item to remember is that when a REIT sells an investment property, it does not have to pay Capital Gains Tax (CGT) on the profit. As a result, investors win because the fund’s capital is re-invested without being eroded by CGT. As with any share trading activity, investors will be subject to CGT on the selling of their REIT shares.
- When investing in a Tax-Free Savings Account (TFSA), a particular vehicle in which neither income nor capital gains are taxed, it’s crucial to keep in mind that some asset classes are more suited than others.
than others for inclusion. Equity and listed property investments benefit the most from a TFSA since they provide higher real (after inflation) returns over time than cash and bonds and are often not subject to other exemptions.
Because interest on cash and bonds is subject to large income tax exemptions (the amount varies depending on the individual’s age), there is no reason to keep them in a TFSA. Furthermore, these investments have no fundamental underlying growth in income, and capital gain potential are restricted. In most cases, income from equities and listed property assets (in the form of dividends or REIT distributions) is taxable in the hands of the investor, as are capital gains over R40,000 per year. As a result, these assets save more money in a TFSA than cash and fixed income.
How much do I need to invest in REITs in South Africa?
To be listed on the JSE in South Africa, a REIT must possess at least R300 million in property, have debt of less than 60% of its gross asset value, generate at least 75% of its income from real estate activities, and pass through at least 75% of its income to investors (90 percent in the US).
How often do REITs pay dividends South Africa?
Reits are required to pay at least 75% of their distributable revenue as a dividend every year. This provides them with tax advantages because their profits are taxed at the shareholder level rather than the business level.
Can anyone invest in REITs?
Individuals can invest in REITs through a variety of methods, including publicly listed REIT equities, mutual funds, and exchange-traded funds. REITs are also becoming more popular in defined contribution and defined benefit pension plans.
Can you lose money in a REIT?
- REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
- One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
- Investors find it difficult to sell non-traded REITs because they have low liquidity.
- When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
