The Zimbabwe Stock exchange recently 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.
REITs vs Real Estate
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 Justice 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.
Mr Bgoni did not have full details but we can expect the ZSE to roll these out soon. As such we cannot definitively say if the REITs the ZSE plans to roll out will provide investors with any tax advantages over real estate and real estate companies such as Dawn Properties. Rental income is taxed at the corporate 25.75% tax rate. So a company that invests in property like Dawn will also incur similar income tax. However, when a Zimbabwean company pays a dividend to a resident there is a withholding tax of a further 15% (10% if the company is ZSE listed). If REITs are given special rules such as a lower tax rate which Mr Bgoni may have hinted at while speaking to Zimpapers Television Network on the subject they may prove attractive.
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. Yes the ZSE is extremely late to the party with its raft of changes including the new indices. Better late than never.