Making the case for listed property – REITs to be more specific

After their strong performance during the falling interest rate environment of the past few years, investors in JSE-listed property caught the jitters after the unexpected interest rate rise last month. Real Estate has a poor record in upward interest rate cycles. But Vukile's Laurence Rapp says those who dumped and ran did so prematurely. Sure, he's talking his book. But he does make a good case in this blog. Certainly worth reading before dropping any more shares in REITs (Real Estate Investment Trusts). – AH    

By Laurence Rapp*

If you want to earn regular, predictable and tax-efficient annuity income that can grow each year from an investment that also offers capital growth potential, then the listed property asset class, and REITs specifically, may hold the answer for you.

Listed property has been the leading asset class in South Africa over the past 15 years. Thanks to its positive performance, this small sector on the JSE has grown tremendously in recent years. And, with the introduction the South African REIT tax dispensation, it has gained greater attention from investors both locally and abroad.

Listed property is the top performer of the four traditional asset classes over the past 15 years, outperforming bonds by 13.3% per annum and equities by 6.4% per annum.

However, some investors still mistakenly lump listed property with other asset classes.

While REITs may be similar to bonds in terms of stability, they are a genuine equity play with income and capital growth. This means, that while REITs have qualities of both, they can't be substituted with either. They are a unique part of a balanced investment portfolio.

SA REITs, with very few exceptions, invest exclusively in commercial properties. Most SA REITs own several kinds of commercial properties, such as shopping centres, office buildings, factories, warehouses, hotels and hospitals in cities and towns across the country. Some even invest in properties abroad.

They earn their income from property lease agreements. In South Africa, these leases include built-in annual escalations, currently around 8% on average for commercial property. This means REITs receive rental income that increases annually, which leads to growing income returns. And, capital growth is linked to growing income returns.

The length of these leases, typically anywhere from three to 15 years, means that REITs have contractual income streams that are both predictable and defensive in nature.

REITs also offer investors the benefit of annuity income, with regular income distributions. At least 75% of a REIT's taxable earnings available for distribution are paid to investors each year. Many pay out even more, most pay almost 100%. Most REITs pay distributions twice a year. Some also offer the choice for investors to re-invest these distributions, should you wish to increase your investment instead of getting the income.

Buying a mega-mall property is unthinkable for most South Africans, but an investment in listed property is much more accessible, making it easier for all South Africans to gain access to the benefits of commercial property ownership.

Investing in REITs is less costly than owning a physical property. REITs are liquid and easy to buy, or sell, on the JSE. They also allow aspirant property investors to invest in a wide range of properties, spreading their risk across a number of different property types, rather than exposing them to one asset.

REITs also have professional managers who maximise the performance of their properties. These managers are skilled at compiling portfolios that meet a specific REIT's investment strategy with the best quality properties and strong creditworthy tenants. They also actively manage and improve the properties. And, REITs are regulated by legislation which demands excellent governance and regular reporting. REIT directors are accountable to the JSE or FSB, depending on how each REIT is structured.

Tax is another area where REITs offer a unique proposition. They benefit from predictable and see-through taxation making it easier for investors to predict returns.

The SA REIT Association represents the South Africa's listed REIT sector. SA REIT members comprise all listed SA REITs and represent around R230 billion worth of real estate assets. The quality of these SA REITs influence our economy and the quality of people's lives.

* Laurence Rapp is the CEO Vukile Property Funds and has extensive experience in financial services. He was previously a director of Standard Bank, having headed the Insurance and Asset management division and, prior to that, being in charge of the Strategic investments and Alliances division.