How Do REITs Work?

By Tked August •  Updated: 10/06/24 •  6 min read

REITs have been showing up as a popular vehicle through which South African investors can be exposed to real estate without the difficulties of directly owning a property. Through a REIT, diversification into a range of real estate assets- office buildings, shopping malls, and apartment complexes, among others- can be made possible, together with income generated from such properties. On the one hand, REITs pay investors regular dividends, found within current income, with the same proposition offering the probable capital appreciation in the long run.

- ADVERTISEMENT -

REITs Definition and How They Work

It is an enterprise that owns, operates, or finances income-producing real estate. They acquire a diversified portfolio of properties with funds from several capitalists and manage the profile to generate rent or property sales income. Properties managed and operated by REITs include office buildings, commercial shopping centers, residential complexes, and all types of concern.

South Africa requires listing on the Johannesburg Stock Exchange. It also hews to several specific legal requirements regarding REIT status. One crucial rule requires that at least 75% of a REIT’s taxable income must be disbursed to shareholders through income dividend payments, typically an income source from bailed rentals paid by tenancy or from property sales.

REIT investors purchase shares in the trust, thereby buying into a company. They, therefore, benefit from the underlying real estate without necessarily having the title to the property. This makes REITs more accessible for those wanting to try their hand at real estate but cannot afford the capital outlay or expertise required in property ownership.

REIT share values typically rise and fall with the real estate assets’ overall performance, market performance changes, and property demand. However, the most attractive feature of REITs is that they will provide income regularly to investors by distributing dividends. For SA capitalists, REITs offer a liquid, diversified means to venture into real estate, with the ability for long-term capital appreciation.

How Can You Invest in South Africa REITs?

First, there is the need to check the available REITs on the JSE. There are established ones in SA, such as Growthpoint Properties, Redefine Properties, and Hyprop Investments. All these have different focuses, whether commercial, industrial, or residential real estate. It is relevant to look further into the organization and performance of the REIT’s profile and its management before the decision to invest can be made.

To invest in REITs, one needs to open a brokerage account or a standard stock brokerage account through which one buys and sells shares on the JSE. There are various online platforms and traditional brokers through which REITs are available. Compare the services offered versus brokerage fees with the features that different accounts may offer.

With your brokerage account set up, you can order the REIT shares you choose. You need to determine how much you want to invest and can set your order to reflect your capital. You can buy shares via a market order, securing them at the current price, or a limit order, purchasing at a specific cost.

After buying, it’s necessary to pay attention to the workings of your REIT: how often it pays out dividends, the state of the real estate market in particular, and news about your REIT. You might reinvest your dividends or change your portfolio composition over time based on market conditions.

- ADVERTISEMENT -

How Do You Make Money with a REIT?

One of the major attractions of REITs is that they will pay consistent dividends. Because REITs must distribute a significant percentage of their income to the shareholders, they could expect regular returns from the assets. Look for REITs with a good payout history concerning dividends and whose dividend yields are sustainable. South African REITs typically yield better than traditional stock, generally being an attractive income-generating asset.

A thoughtful way to supercharge your returns is to reinvest your dividends. Most brokers have instituted automatic dividend reinvestment plans. These plans enable you to buy more shares with the money that your earned dividends make. Time and this compounding effect create significant investment growth.

While dividends are a significant source of income, REIT share costs can shoot up. If the underlying real estate portfolio increases in value or rental income increases, the price of REIT shares can rise. When real estate markets grow, one can earn higher dividends and share price rises by investing in REITs.

One of the most critical investment strategies in REIT involves diversification. You can spread your investment across different sectors, such as residential and commercial to industrial properties, to minimize risks on specific market exposure.

What is the Downside of REITs?

Interest rates are sensitive to REITs. With the increase in the percentages of interest, the cost of borrowings shoots up, thereby affecting the profitability of the underlying properties the REIT has ventured into. Also, with higher interest readings, other income-producing venturing instruments like bonds become more attractive, thus cutting the demand for REIT shares.

Like any publicly traded asset, REITs are at the mercy of the market. If the more prominent real estate market performs less, or if economic conditions start to deteriorate, the value of REIT firm shares could fall.

Because REITs have to pay out most of their incomes to the shareholders, very little, if any, may be left to reinvest. This might hamper their growth in comparison with other investment alternatives.

How Much Cash Does One Need to Invest in REIT?

The good thing about venturing into REITs in SA is that one doesn’t need big cash; therefore, it can be affordable for almost any capitalist. Depending on the REIT share price and your brokerage platform, the minimum investment will dictate this. You can quickly start investing with a few hundred rands on average. Similarly, some online brokers provide the opportunity to buy fractional shares, making it even easier for those with smaller capital to enter trades quickly.

- ADVERTISEMENT -

Keep Reading

Best Investments in South Africa

Best Investments in South Africa

In South Africa, you can choose various venturing options to help you meet your monetary objectives. Below are some of the top-rated opportunities:

When Should One Begin Investing in Mutual Funds?

When Should One Begin Investing in Mutual Funds?

This article will explain when to start venturing, at what age, how much is needed to invest in the schemes, and which mutual funds are best for beginners.

How to Legally Buy Bitcoin in South Africa

How to Legally Buy Bitcoin in South Africa

This guide will show you the legitimate process of buying Bitcoin in South Africa, the legality, the best wallets to use in South Africa

Where to Buy Stocks in South Africa?

Where to Buy Stocks in South Africa?

Major trading in South Africa's stock is handled through the Johannesburg Stock Exchange, but various other avenues exist for capitalists to participate in the market.

Why You Shouldn’t Withdraw Cash From Long-Term Investments

Why You Shouldn’t Withdraw Cash From Long-Term Investments

This can throw your financial goals asunder and bring you opportunities to realize missed growth.

How To Invest Your Money Short-Term

How To Invest Your Money Short-Term

Understanding all the possible avenues available and how best one can apportion their short-term investment

What Are Shares?

What Are Shares?

This article has been put together to explain in simple terms what shares are, the basis one needs to know before investing

What Are the Best South African Shares to Buy Now?

What Are the Best South African Shares to Buy Now?

We look at how you can identify top-performing shares, how to make money from them, and possible returns from such stock investments.

How to Buy Old Mutual Shares

How to Buy Old Mutual Shares

Buying or selling Old Mutual Shares in South Africa is relatively easy, whether you are a first-time investor or already an active one in the security markets.

Investments that Pay Monthly Income in South Africa

Investments that Pay Monthly Income in South Africa

Understanding the various options available in investments will help you make a decision that will secure a stable and continuous income stream.

Is It Good to Borrow for Investment?

Is It Good to Borrow for Investment?

While it might amplify gains, it also amplifies losses. Thus, it's pivotal to understand how this works and the associated risks and disadvantages before making any decisions.

How to Choose the Best Retirement Annuity

How to Choose the Best Retirement Annuity

So, let's look deeper into how getting the right RA could secure you a comfortable and financially stable retirement.

Top 10 Best Investments in South Africa

Top 10 Best Investments in South Africa

The focus of this article is to show various ventures that produce a monthly income in South Africa.

6 Ways to Save Money as a Student

6 Ways to Save Money as a Student

This paper will outline some tips that will help students in South Africa save their cash to the best of their abilities and manage it effectively.

How to Fund Your Dream Vacation with Mutual Funds

How to Fund Your Dream Vacation with Mutual Funds

You can see your money grow and eventually cover holiday expenses by investing correctly in mutual funds and planning.