You’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. Johan Fourie, Head of the Exchange Advisory Division at Pallidus Capital shares insight into what exactly the options are right now.
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 to 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 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.
One company that has gone this route is Heartwood Properties, the first property company to list on the 4AX. It specialises primarily on properties in the warehousing and commercial sectors. Heartwood has extensive experience of the commercial property sector and a deep understanding of the trends impacting it, the expertise to develop sought after commercial property, and the ability to market these properties and mitigate risk in the way that leases are structured. An investment of this nature offers investors a relatively direct exposure to quality commercial property holdings and developments with attractive returns – but without many of the associated risks.
Property companies with primary and secondary listings
This option provides your portfolio with international exposure without having to worry too much about exchange control regulations and/or implications. 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. 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. 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 that property has not performed well this year, there are investment opportunities. Property entities are capital hungry so there remains significant demand for capital.