Real Estate Investor Magazine South Africa July 2015 | Page 42

STRATEGIES

Invest In Buy-To-Let

or REITs?

Is it better to buy-to-let or invest
in property stocks?
BY DALE PECKOVER

I

ndividuals can invest in REITs either by purchasing
their shares directly on an open exchange or by
investing in a unit trust that specialises in public
property.
It is easy to see why buy-to-let is an attractive
investment: you can see your property, and manage it
in a way you just cannot do with shares. However, it
is easy to overlook the real investment risks associated
with buy-to-let, the considerable costs you might incur,
and the drain this type of investment has on your time.
If you want to have the laid back life as a property
investor, property stocks are the way to go.
Gearing and cost of debt
If a bond is used to purchase your buy-to-let property,
this is essentially gearing or leverage (i.e. the use of
borrowed capital to generate/increase the potential
return of an investment). By investing in REITs, your
gearing is still achieved, however, at a much lower
borrowing rate due to the borrowing being done by the
REITs. Where individuals are able to borrow at prime
or prime less 1%, REITs are able to borrow at a rate of
at least prime less 2%.
Risks
• Default and loss of risk: When buying-to-let,
any borrowing to acquire your property is done
in your personal capacity thus introducing the

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JULY 2015 SA Real Estate Investor

risk of default, being blacklisted and potentially
losing more capital than you put in (ie the amount
you borrowed, the amount you put in and any
outstanding interest). When buying property
stocks, the borrowing is done by the REITs
themselves. Therefore, there is no debt in your
personal capacity and thus no risk of default.
• Increasing interest rates: Interest rates are at
historically low levels and may rise in the coming
years. The rise in interest rates will directly impact
your borrowing rate, and as such your risky monthly
repayments.
When investing in REITs, the interest rate needs to be
addressed by the REIT and not by you. Many of the
REITs are hedging or have already hedged a portion of
their interest rate exposure to minimise their risk in an
increasing interest rate environment.
• Volatility risk: REITs are subject to stock market
volatility, however, house prices also fluctuate,
although less frequently.
• Vacancy risk: When you own a property, you face
the risk of your tenant leaving, cancelling or not
paying. When any of these things occur, you face
the risk of losing rental income and the cost of
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