S.Africa catching up to global real estate investment trends


Experts say the introduction of Real Estate Investment Trusts (REIT) has resulted in a wave of conversions of various property vehicles into this tax-efficient structure.

This trend is in line with international developments, which has seen REITs gain significant prominence over the last few years.

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According to Ken Reynolds, Nedbank Corporate Property Finance Regional Executive: Gauteng, South Africa tends to have more generalist property REITs that invest in a mix of segments such as commercial, industrial, office and retail.

“One of the trends we have seen internationally is for more focused REITs that invest solely in just one segment of the property market,” said Reynolds.

“While many international REITs are weighted in favour of a specific sector, this trend hasn’t emerged in South Africa yet. Over time we could expect to see more focused REITs locally and in fact it is likely that a REIT focused purely on the residential sector will list at some point over the next 12 months.”

Reynolds said this would be completely new to local market and could be the catalyst towards more sector-specific REITs.

Investment into residential property has been recorded internationally; Reynolds said South Africa was still lagging behind.

“Traditionally, residential property has not formed a significant part of listed property portfolios. Some existing REITs do have small residential components, but usually as part of a more diverse property portfolio,” he added.

“These investments also tend to focus on the inner city and affordable housing segments, rather than high-value, premium properties, as this is not where institutional investors have traditionally invested and ownership is spread.”

Reynolds said for investors considering investing in REITs, it was important to look at the weighing of the property segments within a REIT, as this will have a significant impact on the performance.

“It is true that a general fund is often a safer investment, as it enables the investor to hedge risk as property segments move in different cycles; but this also means potentially lower returns.”

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A further development that is likely to be seen in the local market is institutional investors and large insurance companies continuing to shift their existing property portfolios into REIT structures.

“Many insurance companies have already been following this trend by disposing of many of their property assets, thereby removing the need to manage property and enabling them to focus on their core business,” added the industry expert.

“The emergence of REITs in South Africa has already been beneficial, as the other vehicles such as Property Unit Trusts (PUT) and Property Loan Stocks (PLS) were relatively unique to South Africa. By following international practice, we could also encourage foreign investors to invest in South Africa’s largest listed property counters.”

“Furthermore, PUTs and PLSs were limited in the corporate activity that they could engage in, which the REITs structure has addressed, ensuring that the reorganisation and flexibility of a property portfolio is now simpler.”

South Africa’s inaugural REIT Conference 2014 funded by Nedbank is expected to create a forum to debate the introduction of REITs in South Africa and to understand how international developments in the industry may further effect change locally.