Real Estate Investor Magazine South Africa October 2018 | Page 42

FINDING
Investment opportunities
exist in the commercial sector
despite recession
Y
ou’ve got some available income to invest and your
portfolio is lacking a commercial property investment.
What exactly should you be looking for?
Many investors feel daunted by the large capital outlay
required for a real estate investment and the onerous and
time consuming responsibilities of being a landlord. A viable
alternative to physical property ownership is to invest in a Real
Estate Investment Trust (REIT) or a property fund. 
A REIT is a company that owns, operates or finances
income-producing real estate. It’s an ideal investment for an
investor who wants exposure to the property ​market without
having to make that large capital outlay. 
REITS have to comply with certain exchange regulations
including the fact that they are obliged to pay at least 75%
of their taxable earnings to investors as dividends which gives
investors assurance that a net income will be paid out. 
These kind of trusts typically earn their income from
property leases which means they can be expected to have
a relatively stable income stream which is annually adjusted
in order to keep pace with inflation. Many REITS in South
Africa earn their income from commercial properties with
long lease periods, another factor in their favour which adds
additional stability. That’s not say REITS are entirely risk free
as they do face a degree of risk from unpredictable economic
circumstances which can negatively impact rental income and
subsequently the price of the REIT. 
When you invest in a REIT you are directly invested in that
trust so do your homework to ensure you’re comfortable with
the company’s property portfolio.
A property fund, on the other hand, is a mutual fund that
invests in publicly listed property companies. It typically offers
a more diversified portfolio than a REIT and is less risky. They
have the benefit of offering good returns including dividend
payouts, underpinned by capital growth on the assets. Most
property funds don’t require a huge investment and you
invest what you’re comfortable with investing. The funds are
generally liquid and – depending on the exchange’s regulations
– are paid out fairly quickly. 
A third option is to invest in a listed property company.
While a direct property investment is capital intensive,
investing in a listed commercial property company is far less
capital intensive. Institutional investors, however, rarely invest
in smaller property companies so there is opportunity for
sophisticated investors who are prepared to weather higher
potential risks for potentially higher returns. 
While there are rewards for commercial property investors
prepared to go the distance, it’s vital to understand the
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OCTOBER/NOVEMBER 2018 SA Real Estate Investor Magazine
inherent risks involved. Do your homework and make sure
the company you are investing in has the right profile of
commercial properties in its stable, in the right areas and
with an appropriate long term tenant mix. This can be a
good investment for investors eager to reap the benefits of
commercial property investment but who lack the requisite
expertise required of this sector. 
Yet another option is to consider investing in property
companies with primary and secondary listings, says Johan
Fourie, Head of the Exchange Advisory Division at Pallidus
Capital.  “This provides your portfolio with international
exposure without having to worry too much about exchange
control regulations and/or implications,” he points out. It’s
important to familiarise yourself with the relevant exchange
control requirements, as your rights differ depending on
whether it’s a primary or secondary listing. 
There are a number of new property listings in the pipeline
for both the JSE and 4AX, some of which are secondary
listings, offering property investors the opportunity to benefit
from international exposure. 
Consider the exchange on which the stock is listed,
especially if you are a retail investor, explains Fourie. The most
important factors to consider here are the listing requirements
and rules regulating the exchange, ease of access to the
market, the required liquidity of the share, the availability of
information to enable investors to make informed investment
decisions and the cost associated with trading. One of the
benefits of investing in companies listed on 4AX, for example,
is that investors don’t have to pay any minimum trading fees. 
“At the end of the day the investment vehicle you choose
really depends on your personal appetite for risk,” says Fourie.
“The South African Property Index has not performed well
this year and is down approximately 25% year-to-date, despite
the fact that in previous years it has been a reliable investment.
Currently this situation is being exacerbated by weak market
conditions and uncertainty around land expropriation without
compensation.”
Long term, however, property is a reliable investment for
investors who are prepared to be invested over time. And
despite the fact property has not performed well this year,
there are investment opportunities. Property entities, points
out Fourie, are capital hungry so there remains significant
demand for capital.
SOURCE
Heartwood Properties, Pallidus Capital