How can I make money investing in listed property?

Key takeaways

  • Listed property is an asset class, similar to equities, comprising specialist property investment businesses listed on a stock exchange.

  • Advantages over physical property include diversification, liquidity and no issues with tenants.

  • Real estate investment trusts (REITs) are structured with investors in mind.

  • Distributions, primarily from rentals, form a generally reliable income stream.

  • You can invest directly through a share platform or indirectly through unit trust funds and exchange traded funds.

There are two ways of investing in property. The first is buying physical real estate in the form of a residential or commercial property that you can let. The second is buying shares in a business that specialises in investing in physical property, from which it receives rental income.

What is listed property?

Listed property is an asset class, similar to equities, comprising specialist property businesses (companies and special types of trusts – see below) listed on a stock exchange. Read more: How do asset classes classify the things in which I can invest?

You can invest in these entities as you would invest in any publicly listed company, although there are certain differences.

What are the advantages?

Listed property has distinct advantages over physical property as an investment:

  • Diversification. You invest in a portfolio of investment properties owned and managed by the business. Read more: Why should I diversify my investments?

  • Liquidity. Listed property is far more liquid than physical property, meaning that your investment is much easier and quicker to buy or sell. Think of the time and effort expended in selling a physical property: you need to find a buyer, which could take months, and once you have found one and agreed on a selling price, you have to wait another few months for the transfer to go through to receive your money.

  • There are considerable costs involved in buying and selling a physical property, including transfer duty, conveyancing fees and the estate agent’s commission. There are also high costs of property ownership and management, including rates, insurance and maintenance. You are not responsible for any of these when you invest in listed property.

  • You avoid the practicalities of managing tenants and maintaining the property.

What kinds of listed property entities are there?

There are three types of entities listed on the stock exchange: listed property companies and two types of real estate investment trusts, commonly known by their acronym, REITs:

  • Listed property companies. These are public companies that share their profits with shareholders in the form of dividends, just like any other publicly listed company. Shareholders have voting rights at annual general meetings.

  • These are popular in many countries but relatively new in South Africa, introduced in 2013 to replace two older structures: property loan stock companies (PLSs) and property unit trusts (PUTs).

    REITs have more onerous protections for investors than listed property companies, but in return, they receive certain tax advantages. The two types are:
  • Company REITs. These replaced the old PLSs and have the legal structure of a company, but are subject to the REIT provisions.

  • Trust REITs. These replaced PUTs and fall under the Collective Investment Schemes Control Act, which governs unit trust funds and other collective investment schemes. They have a trust structure, with a trust deed and trustees. Instead of buying shares, you buy units, as you would in a unit trust. Note that these entities should not be confused with unit trusts that invest in listed property (see below).

What types of properties do the entities own?

Listed property companies and REITs typically own and manage commercial properties such as office blocks, shopping centres, warehouses and hotels. To a lesser extent they own residential properties. South African REITs are permitted to have offshore property holdings.

Overseas, REITs have become far more specialised than here in South Africa. For example, there are REITs that focus on hospitals and healthcare facilities, while others focus on student accommodation.

How do you make money from listed property?

As with equities, there are two sources of returns: capital gains and distributions of profits.

  1. Capital gains. You make a gain when the share price rises above the price at which you bought it.

  2. Distributions. Distributions, which typically occur quarterly, predominantly comprise profits from rental income.

In the case of REITs, one of the provisions is that 75% of profits (of which 75% must be from rentals) must be distributed to shareholders.

Commercial properties generally have long-term leases, ensuring that the rentals are relatively stable and typically keep pace with inflation.

Thus listed property can provide a relatively reliable income stream for investors.
One of the provisions of REITs is that distributions are not subject to dividends tax (and therefore not referred to as dividends), but are taxable as income in the hands of the investor.

What are the risks?

The share prices of listed property companies and REITs generally mirror the state of the property market. Share prices can drop when rental demand or property prices fall.

Listed property had a long period of good returns before the Covid-19 pandemic hit in 2020.

Since then, various factors have negatively affected local and overseas property markets, including the rise in inflation worldwide and the accompanying rise in interest rates.

During the Covid-19 pandemic, many REITs suffered losses and were forced to suspend distributions temporarily.

How can I invest in listed property?

You can invest in the companies or REITs directly through a stockbroker or share trading platform, or in unit trust funds or exchange traded funds (ETFs) that specialise in listed property. Read more: What is a unit trust fund? and What is an exchange traded fund (ETF)?

Funds may be actively managed, with a portfolio of shares in the real estate sector on the JSE as well as possible offshore holdings, or passively managed, tracking an index such as the FTSE/JSE Listed Property Index locally or the S&P Global Property 40 index globally.