How to Invest in Property Without Becoming a Landlord

Property as an investment can take one of two forms: you can become a landlord – owning a property and receiving an income from letting it – or you can invest in firms listed on the stock exchange that specialise in owning, letting and managing physical properties. We take a look at the second of these options, known in investment circles as “listed property” and forming one of the four major investment asset classes (the others being equities, bonds and cash).

Listed property firms, although listed on the stock exchange, generally behave differently from listed companies in other market sectors. They offer investors the benefits of owning real estate without the practical problems of being a landlord, and liquidity through shares that can be traded quickly and easily. Because distributions are generally based on contractual rental income that is typically inflation-linked, they are usually more reliable than dividends from normal listed companies. This gives listed property the characteristics of both equities and bonds.

There are two types of listed entities:

1. Listed property companies. These are simply public companies that specialise in property development and management. They have the same legal structure as, for example, an industrial company: shareholders receive a share of profits in the form of dividends, which are subject to dividend withholding tax at 20%, and have voting rights at annual general meetings.

2. Reits. Real estate investment trusts, known as Reits, were introduced in South Africa in 2013 to replace two older structures: property loan stock companies (PLSs) and property unit trusts (PUTs – not to be confused with present-day unit trust funds that invest in listed property). They have special legal and tax structures that are advantageous for investors. There are two sub-types: Company Reits, which replaced the old PLSs and have the legal structure of a company but are subject to the Reit provisions; and Trust Reits, which replaced PUTs and have a trust structure, with a trust deed and trustees. Reits have the following features:

• They must pay at least 75% of their taxable earnings available for distribution to investors as distributions.

• They generally invest in commercial properties with long lease periods, which means that the income stream is typically stable and tends to keep pace with inflation.

• They are required to have a committee to monitor risk.

• Distributions are not taxed as dividends; instead, tax on income is payable in the hands of the investor.​

The Reit industry in South Africa has, until recently, been relatively generalised, with local Reits owning commercial properties across sectors and markets. Offshore Reits, on the other hand, have become highly specialised – for example, a Reit might specialise in developing and managing student accommodation, while another may specialise in green energy installations such as solar arrays and wind farms. As the industry develops in South Africa, we can expect similar specialisation.

How to invest

As an investor, you can buy shares directly in listed property companies and Reits or you can invest in collective investment schemes that specialise in listed property, in the Asisa fund category SA Real Estate General. Note that funds in this category may also have offshore property holdings in their portfolios.

You may also consider investing in an exchange traded fund (ETF) that tracks the SA Listed Property Index or one that tracks an offshore index such as S&P Global Property 40 Index.

Multi-asset funds typically have some listed property exposure in their portfolios, although this has generally tended to be on the low side, at around 5% or less.

Another way you may be exposed to listed property is via retirement funds, endowments, or, if you are retiree, a living or with-profit life annuity.

References:

“Asset classes explained: A closer look at listed property” – M&G

“How can I make money investing in listed property?” – Smart About Money 

“Real estate investment trusts (REITS)” – JSE