Real Estate Investor Magazine South Africa June 2016 | Page 17

WEALTH STRATERGIES
in the stock market with the stability and tangibility
of owning real estate. SA REITs, all of which own
income-producing property, have delivered higher
total returns and lower risk than other traditional
asset classes over 10 years.
As most SA REITs own several kinds of commercial
properties, in cities and towns across the country and
even in other countries, these investments offer great
investment portfolio diversification. REITs are most
suitable to investors who want liquidity along with
exposure to diverse property investments, without the
initial capital outlay or any hands-on management
requirements. Investor risk is mitigated because listed
REITs are regulated by legislation, which requires
excellent governance and reporting.
The total return that REITs create for investors
comes from both the capital growth of its properties
and regular dividends, which REITs pay out from
their profits. Both generally keep pace with inflation.
A REIT’s growth in dividends comes from the
growth in rental from its property assets, thanks to
escalating leases. These leases make it relatively easy
to predict future earnings for investors and provide a
relatively stable income stream, which adjusts upwards
annually thanks to built-in escalations - currently
around 8% on average for commercial property.

Property ETFs

There are a plethora of JSE-listed property companies,
making it difficult to choose the ideal company for
investment purposes. A popular solution is to invest
in listed property through unit trusts or ETFs.
ETFs passively track the FTSE/JSE property
indices, by exactly replicating the indices in terms
of the number and weighting of the property shares
held, while unit trusts are actively managed and will
attempt to outperform the indices, thereby justifying
their higher cost structures. Over the longer-term (5
years), most actively managed funds fail to match the
performance of a passively managed property fund.

Commercial Property

The risks of investing in Commercial Property are
far higher than residential, but so to are the rewards.
There are numerous reasons why commercial property
is preferred over residential property by many
investors.
The right commercial property can produce greater
returns than any residential property.
Commercial property has long-term lease contracts,
unlike residential lease contracts that can only be
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signed for 12 months. Lease terms for Commercial
properties have fixed escalation rates, which directly
influences the escalation of the value of the property
and they are financed based on the value and returns of
the property and the lease contract (unlike residential
property where you need to earn a salary, or have
proof of income, to qualify for a bond).
Commercial property can be refinanced in the
future to release equity in the property solely on the
lease agreements that are in place, while the transfer
and bond costs in obtaining commercial property
are the same as in purchasing residential property.
Commercial properties are built mo