TAFARA MTUTU THIS year is shaping up to be a defining year for local capital markets. Two additional ETFs Morgan & Co Multisector ETF and Datvest Modified Consumer Staples ETF — were listed in the first quarter of the year, and chatter over a new asset class has whet curious investors’ appetite.
Zimbabwe is anticipating the listing of some Real Estate Investment Trusts (REITs) sometime this year, and this could deepen the country’s capital markets.
The addition of REITs on ZSE will also mark Zimbabwe as the fifth African country with REITs after Ghana, Kenya, Nigeria and South Africa. A REIT is an asset class that invests in several real estate investments, which can be both greenfield and brownfield investments.
The asset class offers the same exposure as real estate stocks and direct ownership of real estate but with unique advantages over these traditional exposures.
According to reit.com, there were 865 listed REITs globally as of December 2021 and these had a total market capitalisation of about US$2,5 trillion.
There are several types of REITs, and these are often categorised by real estate sub-sectors such as retail, office, residential and healthcare. The way that REITs work is fairly simple to understand.
A REIT invests in new or existing properties that are then leased to generate rental income which is subsequently distributed to the REIT investors through dividends.
Unlike traditional real estate equities, REITs are mandated to pay almost all income from rentals to investors. The level of distributions to REIT securities holders varies by jurisdiction and the legislation in Zimbabwe stipulates that at least 80% of gross taxable income be distributed.
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REITs offer several advantages over real estate stocks and property ownership, such as (i) liquidity, (ii) lower costs, (iii) guaranteed dividend pay-outs, and (iv) tax breaks. Property markets all over the world are typically very illiquid when compared to REITs.
Properties take weeks, months or even years to dispose of, and savvy investors will understand the hefty opportunity cost this imposes on the seller.
REITs, on the other hand, have a similar liquidity profile to equity and one can swiftly move in and out of REITs with relatively lower liquidity concerns.
In addition, the cost of buying and selling REITs is significantly lower than with properties. The latter often comes with additional costs such as legal costs, appraisal fees, maintenance and repairs, and so forth.
The low-cost and relatively high liquidity profile of REITs will be particularly beneficial to institutional investors in Zimbabwe whose exposure to real estate had been limited to either First Mutual Properties or Mashonaland Holdings after the delisting of Dawn Properties and Zimre Properties Investments in 2021 and 2020, respectively.
The availability of REITs on ZSE will offer more options for real estate exposure at a low cost as well as an additional avenue for steady dividend income.REITs also have an attractive tax profile, which varies by jurisdiction.
According to REIT legislation in Zimbabwe, REITs will be exempt from income tax and REIT security holders will only pay the 1% capital gains withholding tax on disposal of their securities and the 10% withholding tax on dividends earned.
This is attractive even to a real estate equities investor because listed businesses are generally liable to income tax of 25%, and equities investors are liable to a dividend tax of 10% as well as capital gains withholding tax of at least 1,5% when they dispose of some of their holdings.
The asset class also supports job creation and infrastructure development, especially in the case of Zimbabwe, which will only allow REITs to build new properties instead of buying existing assets.
In the US, for example, REITS contributed the equivalent of about 2,9 million full-time jobs in 2020, generated over US$190 billion in labour income, and spent more than US$85 billion in capital to construct new properties and maintain existing properties.
In order to unpack the returns of REITs, it would be prudent to break down sources of return between dividend income and capital appreciation.
REITs offer a more attractive dividend yield compared to real estate stocks. According to Endowus, REITs pay higher dividends than dividend stocks, on average. The average dividend yield pay-out by dividend stocks in the S&P 500 was around 1,7% in October 2021 compared to the FTSE EPRA Nareit Index’s dividend yield of about 3,5%.
However, in Zimbabwe the gap could be wider given that a rental property in Zimbabwe is likely to fetch a dividend yield ranging between 4% and 7% against Morgan & Co Research Real Estate Index’s latest dividend yield of 0,7%.
REITs’ returns through capital gains are somewhat mixed. An analysis by Nareit using data up to June 2021 reveals that REIT offered superior long-term returns when compared to equities and bonds but trailed large and small cap stocks over holding periods of less than 15 years by about seven percentage points, on average.
One should note, however, that past returns are not necessarily indicative of future performance and these trends could upend in the future.
- Mtutu is a research analyst at Morgan & Co. — [email protected] or +263 774 795 854.
