Finance – Easy ways to invest in property
Are you interested in owning property without having to fork out large sums of money? Then REITs are the way to go.What is that, you may ask? Well, read on to find out.
As black women, we dream of owning a home one day. For many, this will be the most significant financial transaction you will ever make. But while young women are interested in owning a home, they might be unlikely to invest in property as a stand-alone asset class. An asset class is a group of investment products with similar characteristics in how they behave and are subject to the same laws and regulations. Financial advisors focus on the term ‘asset class’ to help you diversify your investment portfolio as different asset classes have varying degrees of risk and cash flows streams.
Living costs and rising food and transport prices have put buying a physical property like a house or flat out of reach for many of us. But there is another option, which is listed property, usually referred to as REITs.
REITs stands for Real Estate Investment Trusts. They offer investors exposure to real estate like office, retail and industrial properties. REITs exist in different countries around the world. South Africa replaced property unit trusts and property loan stocks with the REIT structure as a way of bringing local companies in line with global tax and regulatory standards.
REITs are a particular type of listed property company that trades on the Johannesburg Stock Exchange (JSE). It gives you the opportunity to invest in a range of physical properties through the purchase of a single stock, also called shares or equities – they all mean the same thing. These are the real estate companies that rent out property or buy empty plots of land to build new apartments, houses, offices or shopping centres. Simply put, you become an indirect real estate owner without having to physically buy or finance property. Here’s how to do it:
HOW DO I ENTER THE MARKET?
Large property companies are public companies, which means they are listed on an exchange such as the JSE. You can buy shares in property companies through a broker or financial service provider. These people are licensed to buy and sell shares directly at the stock market on your behalf. You can also find all the local stockbrokers on the JSE website. Listed property gives you access to the property market for as little as R500 per month or a R5 000 lump sum.
WHY IS LISTED BETTER THAN PHYSICAL PROPERTY?
Owning physical property can be demanding, because in addition to the purchase price of your home, you also have to pay a transfer duty and you must still register the mortgage. This is charged by lawyers and is called a bond registration fee. The transfer duty depends on the value of your house and you’d still need money for any maintenance on the property. You also need an emergency fund to cover, for example, paying insurance excess when your geyser
bursts or the paint starts to crack. Oh, and don’t forget the additional monthly costs such as property taxes or levies, insurance on the property and life assurance to cover the mortgage. All of these things aren’t cheap. When buying a house, it’s unlikely that a bank will give you a home loan that covers the entire purchase price of the home. You’ll have to put down a deposit, which is usually a lot of money. But, when buying property stocks, no debt is incurred in your name and so there are no risks of default because the REITs do the borrowing. The only risk you take on when you buy REITs is limited to the amount you invested.
As a home buyer, you might require finance from a bank to buy your property and this means you’ll be affected by any fluctuations in the prime lending rate. You can choose to fix the interest rate on your bond in certain circumstances, but this can be very costly if you get it wrong.
When investing in REITs, it’s the REIT that worries about the interest rate – not you. Many REITs hedge a portion of their interest rate exposure to minimise their risk in a rising interest rate environment. A hedge is an investment to reduce the risk of unfavourable price movements in an asset. For example, you take out insurance to minimise the risk of an injury affecting your ability to earn an income, or you buy life insurance to support your family in the case of your death – this is a hedge.
WHAT ARE THE RISKS?
The disadvantage is that REITs are stocks, so exposure to stock-market volatility, trends in the property sector and the individual company’s management of debt can all affect the share price.
So when you’re considering this investment option, you must evaluate the REIT’s debt structure. The management of the debt will have an enormous impact on the company’s long-term performance. Companies use debt differently, so the ‘right’ amount of debt varies from business to business.
When assessing the financial standing of a particular company, various criteria are used to determine if the level of debt a company uses to fund operations is within a healthy range.
You will often come across the term ‘gearing’ when reading financial newspapers or watching business television.
Gearing refers to the level of a company’s debt to its equity capital. It measures the company’s financial strategy and determines the extent to which lenders versus shareholders fund a company’s operations. The significance of gearing in their business models means that REITs can also be very sensitive to rising interest rates.
DO THE BENEFITS OUTWEIGH THE RISKS?
REITs have management companies that attract and manage suitable tenants and the vacancy issue. Income from REITs is called distributions. REITs must pay at least 75% of their taxable earnings available for distribution, thus giving you certainty of company payouts. For companies, the main attraction of REIT status is tax efficiency because REITs do not pay corporation tax or capital gains. If I were to sell my property, it could take months or years to sell if I needed to sell it quickly. I might need to drop the price below the current market value to attract a buyer. By contrast, REITs can be bought and sold with the click of a mouse or through your broker, converting them into cash without losing substantial amounts of time and paying excessive fees.
Regarding returns, there are three primary drivers for REITs. The first and primary one is the rentals paid to the company by its various tenants. This should increase at rates of inflation or more over time. Lastly, there are the values of the buildings that the company buys and sells. These all determine how much the share should be worth. On the other hand, when you purchase your property, you only realise your capital gain when you eventually sell.
DIFFERENT KINDS OF EXPOSURE
How does one choose between REITs? You should opt for the REITs that are trailblazers and deliver high returns. Many REITs specialise in property associated with different business sectors, and diversification in industrial properties, warehousing, offices, residential properties, shopping centres in local cities or even overseas like the UK, Germany, Australia or the rest of Africa. The most obvious way to invest in REITs is directly, purchasing shares in the companies via a stockbroker just like any other quoted company or through diversified funds that buy a basket of shares in real estate companies and REITs such as the Stanlib Property Income Fund or the Coronation Property equity fund, for example. A financial advisor can help you match REITs with your financial goals. I hope I’ve piqued your interest. Do your homework and start investing!