REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors. REITs provide all investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.
The Zimbabwe Stock Exchange announced new products coming to the market and these included Real Estate Investment Trusts (REITs) and Exchange Traded Funds (ETFs). To understand the excitement around these let’s take a look at REITs. Real estate investment trusts are entities that invest in property and have a structure similar to that of a public company. They can focus on a particular type of real estate or diversify. The greatest benefit of REITs is that they allow individuals an easy buy-in to real estate investing.
The entity can be involved in buying, operating and sometimes financing a property. The trust nature of a REIT means that, depending on the rules in the specific jurisdiction, it doesn’t behave the way a typical company does. For example, while you buy into REITs in small units of ownership similar to shares, in some countries they are mandated to distribute up to 90% of their profit as dividends but in Zimbabwe the rate is 80%.
Unlike a real estate developer who builds or constructs commercial properties for sale, REITs own, manage or invest in real estate as part of investment portfolio for the purpose of generating income.In a typical REIT, funds are pooled from various investors who in turn become unit holders in the scheme.
How does a company qualify as a REIT in Zimbabwe?
To qualify as a REIT a company must for income tax exemption:
- Invest at least 75% of its total assets in real estate
- Derive at least 80% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
- Pay at least 80% of its taxable income in the form of shareholder dividends each year
- Be an entity that is taxable as a corporation
- Be managed by a board of directors or trustees
- Have a minimum of 100 shareholders after the year it qualifies
- Have no more than 50% of its shares held by five or fewer individuals unless it is a pension fund
- REIT must be listed on stock exchange
Real Estate vs REITs
Perhaps the best way to explain REITs is to contrast them to real estate which many already understand. In order to invest in real estate, one requires either enough money to purchase a property or access to mortgage finance. This may be difficult. In addition to this, assuming the property is for rental one must either pay an agent to manage the property or deal with tenants, maintenance and other issues directly. REITs can essentially be looked at as offering all the benefits of owning and operating an investment property without the huge buy-in or operational complexity.
Many hold out real estate as one of the best investment vehicles out there and they are not wrong. Zimbabweans who have seen the country go through some of its worst times in the last 30 years wholeheartedly agree that those who held property saw the best of the action in these times. The finite nature of the amount of land available coupled with steady population growth have resulted in a shortage of accommodation for housing and commerce which keeps prices high.
Unlike buying a single property in a single neighbourhood REITs take advantage of their scale and diversify their investment in property across many different types of property in different places. When speaking about REITs, one of the areas Justin Bgoni the ZSE chairman highlighted was student accommodation across the nation. A REIT can diversify by owning shopping malls, student accommodation, residential parks and many other profitable real estate investments. So an owner of shares in a REIT is automatically diversified across the board as opposed to having all your money tied up in one property.
Another key element of REITs is the liquidity factor. They will be traded on the ZSE in a fashion similar to other company shares and therefore offering an opportunity to enter and exit the investment quickly and easily if needed to do so. This is very important when you consider that with property outright neither the entry nor the exit is easy. For those with excess cash who want to invest for the short term, this offers a great option. With the practice of paying high dividends, some can use the dividend capture strategy with REITs. Essentially buying and keeping the shares until a dividend is declared or paid then sell them off.
In theory, at least, REITs do something that is long overdue in Zimbabwe, they put the power of real estate in the hands of small investors and allow the people, through the trusts, to decide which areas should receive attention.