How To Invest In Property Without Buying It Physically

You don’t like bricks and mortar

So, you want to invest in property. But you don’t want the burden of having a single property in a single location or the effort of managing it?

Well, there are options. 

You can invest in property without buying one. 

Many years ago, you had to go through a very expensive broker or know someone who knows someone so that you can buy shares in their non-listed company. 

With technological advancements, this has been simplified greatly with lower fees, opportunities for non-listed property and even property stokvels. If you’re looking to invest in property shares South Africa, there are several options available to you. One popular way to invest in property shares South Africa is through real estate investment trusts (REITs).

Real estate investment trusts (REITs)

So what is a REIT? It’s like a fund. People put their money together, and they buy real estate with the money. The property is generally rented out, and the people owning the ‘shares’/units will earn money after all the fees and bills are paid. 

Many REITs are listed on a stock exchange. As real estate is all about who you know, you REITs often partner with other property companies for all their property needs. For example, a REIT might have as their partners an architect, builder and leasing agent – that is if they don’t do these in house. 

Many REITs have mortgages at different banks so that they can leverage debt. It’s thus important to check out the debt/equity ratio.

Because of the contacts and economies of scale,  REITs should be more profitable than many everyday investors. Sadly, there are lots of fees that eat away at the profits. 

REITs and tax

REITs are taxed at your normal income tax rate. You will be taxed accordingly on all income you get from the REIT. 

Does this make you sad?

Well, this means that if you’re in the 30% tax bracket, and you earned R 100, then SARS will take R 30 as their own. 

Dividends tax will not be payable.

Investing in listed companies

DON’T BE STUPID
Don’t invest your life savings in single stocks. Diversify. Do your own research. I mention names for the sake of examples. I don’t condone them or invest in them.

Though a bit riskier, it’s possible to invest in single companies that serve the property industry or own property themselves by buying shares. There are quite a few to choose from, including construction and engineering, and companies that actually own property. 

Some of these companies include Growthpoint Properties Ltd and Redefine Properties Ltd.

It’s worth researching this thoroughly, as you do not want to invest all your money in a single company, just to lose all your money. 

Listed companies and tax

Investing in non-listed companies that own property

A few years ago, this was a dream for many people. With companies such as EasyProperties, you are able to buy shares in a company that owns real estate.

These differ from listed companies, as they are not listed on a stock exchange (stating the obvious). They do not have to comply with the JSE rules on market cap and stock market legislation, giving them the freedom to invest in smaller investment opportunities that could yield higher returns.

These companies could pay a dividend monthly, quarterly or annually – or not at all. There might also be some rules on when a share holder will be able to buy or sell their shares.  

Non-listed companies can be another way to invest in property shares South Africa. These shares may also be accessible through non-listed companies that focus on the property sector.

Non-listed companies and tax

When investing in shares of these companies, the normal tax rules apply.

If you get dividends, you will have to pay dividends withholding tax (20%) which is already deducted before you get your money.

If you decide to sell your shares, the calculation is a bit more complicated. Check the article here for those calculations! Certain rules might apply to when you’re allowed to sell the shares, such as once in a quarter or after 2 years. This is needed for liquidity and managing supply and demand of all the shares., 

Property Stokvels

In South Africa we also have property stokvels which can be another way to invest in property in South Africa. The way this works is everyone in the stokvel contributes to a fund. Here are a few examples of different stokvels. The members contribute to the stokvel –

• Every month one person gets a large amount from the fund to buy the things they need.
•  The money is invested in the stock market for a set time and then cashed out and split according to what everyone contributed
• The money is invested and used to buy real estate. Each member gets shares depending on how much they contributed. The rent is paid out to the members in an agreed interval or reinvested.

Stokvels force people to save. There is normally a legally binding contract in place that will table the requirements of how much should be invested, outcome, timespan and other details. 

These stokvels could be managed by a company, a friend or a lawyer. It is recommended that you only invest in a stokvel with people you trust – or legally regulated.

Conclusion

We really have many opportunities to invest in property that is not physical property. Some of these include listed property (both owning property and working with the property industry), unlisted property, REITs and property stokvels.

If you really don’t want to own property – that’s okay. 

You can still invest in property.

Happy investing.

Sources consulted

• REITS – Implementation issues
• REIT Institute – REIT leverage metrics