How to ... invest in listed property
You may want to invest in property but you do not know how the rental property market works, you don't have the time to deal with tenants and collect rents, or you don't want the hassles of administration and maintenance. If this is the case, listed property may be the solution. In this instalment of our series on how to manage your money, we tell you about investing in listed property.
Listed property companies are listed on the JSE. They invest in a port-folio of properties and handle the administration while you collect the returns on the investment.
A listed property investment will suit you if you want returns in income over the long term rather than a quick speculative return.
There are four different types of listed property investments: property unit trusts; property loan stock companies; listed property com-panies; and exchange traded funds (of which there is one in South Africa, Proptrax).
One of the advantages of listed property is that the profits can be projected with a fair degree of accuracy, because they are derived from rentals paid for properties in the company's portfolio.
The advantages of investing in listed property compared with investing directly in property include:
- You need less money to invest in listed property.
- You don't need to raise a mortgage bond.
- You don't have to find tenants to pay rent in order to earn an income on your investment.
- You don't have the responsibility of maintaining the property.
- Listed property offers liquidity and tradeability, which means you can sell your listed property shares easily, whereas it may take weeks or months to sell a physical property.
You will also incur high transaction costs, such as estate agent's commission, when you sell a physical property.
- An investment in listed property gives you exposure to properties around the country and to various sectors of the property market, such as commercial, retail and industrial property.
How you earn returns
You earn returns from listed property in two ways:
- You share in a proportion of the income that is earned by the listed property entity. The listed property entity earns income from sources such as rentals paid by tenants. This income is called the yield.
- The growth in the value of the units listed on the stock exchange. This is called capital appreciation.
The yield and the capital appreciation together are known as the total return on the investment.
In mathematical terms, the yield is the distribution, or income, paid out, divided by the share price and expressed as a percentage. So, if your investment gives you a distribution of 20 cents at the end of the year and the price at that time is R2, the yield will be 10 percent (20 cents divided by 200 cents and multiplied by 100).
PROPERTY LOAN STOCK COMPANIES
Property loan stock (PLS) companies were introduced in the late 1980s as an alternative to property unit trusts (PUTs), because at that time the legislation that governed PUTs was to some extent outdated and inflexible. PUTs were prohibited from borrowing money to buy property and were restricted to investing in fixed property rather than listed property.
Unlike ordinary listed companies, PLS companies invest solely in property. As with other listed companies, PLS companies are subject to the Companies Act and the JSE's regulations, and are governed by their own memoranda, articles of association and debenture trust deeds.
The main difference between PLS companies and other companies is how their owners fund them. When you invest in a PLS company, you buy a linked unit.
A linked unit consists of a share and a debenture (or loan). The debenture portion earns interest at a variable rate.
The interest comes from the net income (income less expenses) that the PLS company derives from rentals on the properties in which the PLS company invests.
The share portion only makes up a nominal value of the linked unit.
Similar to PUTs, the income from a PLS company is taxed in your hands. But the income is paid out in the form of interest on the debenture portion of the linked unit.
Usually, PLS companies distribute all their profits mainly through debenture interest, with the balance paid out as a dividend. Distributions are paid out at least twice during the financial year, but they can be paid as often as quarterly.
The conditions and terms of the debentures, including the rate of interest and repayment dates, are governed by the debenture trust deed.
Independent trustees are appointed to look after your interests as a debenture holder.
There are 13 PLS companies listed on the JSE. The major players include Growthpoint, Redefine and Hyprop.
PROPERTY UNIT TRUSTS
Unlike ordinary unit trust funds, PUTs are listed on the JSE. However, PUTs are controlled by the same law that regulates all unit trusts, the Collective Investment Schemes Control Act (Cisca).
Cisca allows PUTs to pass on the income they earn to you, the investor, by way of distributions.
The South African Revenue Service taxes the distributions in the same way it taxes interest earnings. If you are under the age of 65, you are not taxed on the first R21 000 of interest you earn. If you are aged 65 and older, you are not taxed on the first R30 000 of interest you earn.
By law, all the income earned by PUTs must be paid out to investors.
Currently, the PUT sector has a market capitalisation of about R25 billion, most of which is concentrated in the Fountainhead, Emira and SA Corporate funds.
Historically, PUTs were more strictly regulated than property loan stock companies and could not, for example, borrow money from a bank to buy more properties.
PUTs were also not allowed to buy back the shares they issued and could only invest in fixed property.
But this has changed. PUTs can now buy back shares they have issued and can invest in non-fixed property. A PUT's borrowings are limited by its trust deed to a percentage of the fund's assets. The amount of borrowings may be changed with the approval of the unitholders.
LISTED PROPERTY COMPANIES
Some listed property companies are not restricted to investing directly in property but can also buy shares in other listed property companies. An example of such a company would be Ingenuity Property Investments, which was previously known as SA Reit Ltd.
Unlike PUTs and property loan stock companies, which have to pay out all their income in the form of dividends, listed property companies can choose how much of their income to pay out in the form of dividends.
About four or five such property companies are listed under the real estate sector of the JSE.
Property companies are controlled by the JSE's regulations and the Companies Act.
As with other listed companies, they issue shares to raise capital and pay dividends to investors.
A listed property company pays tax on its profits. When the company distributes its profits via dividends, it also pays secondary tax on companies (STC). However, this will change when STC is scrapped and replaced with dividend tax. Once this happens, the company will pay dividend tax on your behalf before paying you a dividend.
You can buy as many shares in a listed company as you want. However, because of the minimum costs of brokerage, it is not cost-effective to make investments of less than R2 000. If you want to invest smaller amounts, you should consider PUTs.
Brokerage costs are between one percent and two percent, depending on the broker, the services the broker offers and the size of your investment. You also have to pay uncertified securities tax, which is 0.25 percent plus VAT on each transaction.
Currently, you can invest in only one property exchange traded fund (ETF), Proptrax, which invests in the top 20 listed commercial property stocks.
Some of the advantages of investing in listed property through an EFT include:
- You get exposure to the top property companies, including property loan stock companies and property unit trusts.
- There is no prescribed investment period.
- You receive a quarterly distribution.
- It is far cheaper to invest in an ETF than in each of the stocks it holds. You can invest through a broker, who will charge you an upfront commission plus VAT.
- Transparency - the prices of an ETF are published daily in business newspapers.
- You can invest as little as R300 a month.