When people want to invest in real estate they usually secure a loan to purchase a property, either residential or commercial.
But there are other, more efficient and less costly ways to invest in the property sector, says Marc Edwards, chief executive of Tower Property Fund.
While there are many benefits to direct real estate investment, it is easy to overlook the considerable costs you can incur and the drain this type of investment can have on your time.
Downsides include a lack of diversification, lower liquidity, vacancies leading to loss of rent, property taxes, insurance and maintenance costs.
This is part of the reason why real estate investment trusts (REITs) have become popular, Edwards says. REITs offer many of the same benefits of direct property investment without the problems.
He says a REIT is a company that owns a portfolio of income-producing properties that provides investors with the chance to own property for as little as the price of a share.
“Individuals can invest in REITs either by buying their shares directly on an open exchange or by investing in a unit trust-type of product that specialises in public property.
“Six-monthly dividends will come from the rent collected on these properties and the value of your REIT shares can increase over time - subject to a stable market - as profits grow, so you’ll also own an appreciating asset that grows in value, much like a stock.”
But it is not just about returns.
The benefits of owning shares in a REIT, compared to direct real estate investing, are “plenty”.
These include greater diversification, more liquidity, and not wasting time or effort being a landlord.
With a REIT, Edwards says one is buying a piece of a large real estate portfolio.
“Compared with the price of property and other associated costs of buying, diversification of any sort is difficult and if you were to buy a property yourself, you’d typically be able to finance only a single property.”
The second benefit is more liquidity since REITs can be bought and sold like a stock, unlike fixed property.
“The third benefit is the fact that you don’t have to invest your time being a landlord. Instead, there is a professional management team that does it for the investors of a REIT.”
Edwards says: “The data is clear. REITs have been the best performing asset class in South Africa for the majority of the past 15 years.
“In the past 18 months, returns have reduced due to a number of factors, resulting in a cheaper entry into listed property.
“Therefore, if you’re thinking about increasing your real estate exposure and want access to a diversified pool of liquid property assets that give you six-monthly dividends as well as capital growth, a REIT is probably the right investment for you.”