Real Estate Investor Magazine South Africa May/June 2019 | Page 46

REITS
How REITs can
deliver investor
liquidity
Why REITs
A
Real Estate Investment Trust (REIT) is an
effective mechanism of investing into real
estate that allows private investors to ac-
cess liquidity in a short space of time compared to
physical property investment. REITs investment
removes the hassles and costs of traditional direct
property investment. The core difference between
the two is the limited benefit of leverage applied to
REITs compared to the benefits of leveraging fi-
nance with traditional real estate investment.
REITs are bought and sold on the Johannesburg
Stock Exchange ( JSE), just like any other share
purchase it does take investment capital to get
started. REITs are created when companies use
investors’ private money to purchase and operate
income properties. Depending on the REIT they
tend to focus more on commercial investment
holdings such as shopping centres, office buildings,
industrial parks, storage units and a lesser focus on
residential units.
This gives the private investor the opportunity
to invest locally into commercial property mega
shopping malls to the likes of Mall of Africa, V
& A Waterfront, Canal Walk or Sandton City or
even offshore REIT’s commercial investments
in a selected offshore destination. REIT private
investors can now reap the benefits of investing into
those type of assets. It has the benefit of being easier
to access, faster time to transact and also the ability
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MAY/JUNE 2019 SA Real Estate Investor Magazine
to invest alongside experienced experts giving a
safer investment with solid returns.
A REIT aims to pay out maximum (sometimes
90%) of its taxable profits in the form of dividends
to its shareholders to keep its status as an REIT. By
doing this, REITs avoid paying maximum corporate
income tax, whereas a regular company would be
taxed for its profits and then have to decide whether
or not to distribute its after-tax profits as dividends.
Since the 1960s in the United States, REITs have
been a popular choice for income investors due to
their reliable dividend pay-outs and massive capital
appreciation potential.
From the rental, parking tariffs, advertising and
other sources of income the property expenses such
as rates, taxes, electricity, repairs and maintenance
are deducted. This leaves a net property amount
where interest and costs for debt finance are also
deducted. The approximate average leveraged bank
debt for REITs is around 35% and the rest is made
up of equity. Yields can be anything from around
6 - 10% returns. The key benefit of a REIT is the
liquidity and conveniece an investor can derive
from the investment while achieving growth. Many
REIT’s invest in new, growing sectors such as
industrial, storage, affordable accommodation and
retirement.