IN THIS WEEK’S BOTTOM LINE
CONTRIBUTED BY GIELIE FOURIE | OVERBERG ASSET MANAGEMENT
REITs (Real Estate Investment Trusts) build wealth. While the JSE has probably recorded its worst five-year period in history, REITs saved the day. REITs are one of the safest investments available on the JSE.
WHAT ARE REITs? REITs (Real Estate Investment Trusts) originated in the USA in 1960. REITs are now a popular international asset class. REITs came to SA in 2013. To be registered as a REIT, a company must adhere to the following regulations: (1) They must have assets (buildings) valued in excess of R300 million. (2) They must keep their debt below 60% of Net Asset Value. (3) They must earn 75% of their income from rent. (4) They must distribute 75% of their taxable earnings every year. What makes REITs such safe investment vehicles are: (1) the fact that they are not allowed to take on too much debt and (2) they must distribute 75% of their profits every year. It means investors are almost guaranteed to receive a “dividend” (called a REIT distribution) every year. In addition, the 20% DWT (Dividend Withholding Tax) does not apply to REITs. To sum up, you will get an annual distribution with no DWT deducted.
REITs are one of the safest investments available on the JSE. Over a period of five years from 1 September 2014 to 31 August 2019 only 75 companies on the JSE were able to deliver a positive CAGR (Compounded Annual Growth Rate). No less than nine (12%) of these 75 companies were REITs. This solid performance shows that REITs are defensive investments through economic cycles. They have once again excelled among the country’s top companies.
THE SA REIT Association represents SA’s listed REIT sector and its members. There are 30-plus listed SA REITs with a total market capitalisation of some R300bn. Through their property assets and responsible investment in SA’s built environment, REITs influence our economy and the quality of people's lives. REITs create affordable access to property investment and contribute to the savings industry. REITs can be included in tax-free savings accounts. Through REITs you can indirectly invest in some of the most valuable properties in SA, like the V&A Waterfront, Canal Walk, Mall of Africa and many more. You can also invest in offshore REITs listed on the JSE.
THE TOP 100 Companies Sunday Times awards acknowledge those listed companies that have created the most wealth and value for shareholders. Leading the listed property sector, and fourth overall in the Sunday Times Top 100 Companies, is Equites Property Fund with a CAGR of 22.6% over five years. Vukile Property Fund is another top performer with a CAGR of 11.1%. Stor-Age Property REIT also did very well, although was not included in the survey as only companies with a track record of at least five years were considered. Stor-Age will be there next year. Here at Overberg Asset Management we own all three of these top performing REITs (Equites, Vukile and Stor-Age) in our model portfolios.
Read More: Overberg Market Report 27 November 2019