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SA real estate investment trends

29 Oct 2014

The introduction of Real Estate Investment Trusts (REITs) in South Africa last year has already 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.

For investors considering investing in REITs, it is important to look at the weighting of the property segments within a REIT, as this will have a significant impact on the performance. For example, analysts are curtailing projections on the office space segment and instead, expect industrial and larger retail property to outperform.

According to Ken Reynolds, Nedbank Corporate Property Finance Regional Executive: Gauteng, while there are some exceptions, 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.

“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. This would be completely new to our market and could be the catalyst towards more sector-specific REITs.

He notes that while investment into residential property has been recorded internationally, in South Africa we have lagged 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. 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.”

For investors considering investing in REITs, it is important to look at the weighting of the property segments within a REIT, as this will have a significant impact on the performance. For example, analysts are curtailing projections on the office space segment and instead, expect industrial and larger retail property to outperform.

“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.”

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.

“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.” 

Reynolds says that Nedbank, as the lead funder of commercial and industrial property, was pleased to sponsor last week’s inaugural SA REIT Conference 2014, which created a forum to debate the introduction of REITs in South Africa and understand how international developments in the industry may further effect change locally.

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