Global REITs stretch investor horizons

Sarah Steadman, Head: Wholesale Accounts, STANLIB

Despite the close to 50% international exposure in the JSE’s all-share index, South African investors continue to favour direct offshore assets, seeking even greater diversification than the JSE can offer.

Amid the search for the best global opportunities, offshore real estate investment trusts (REITs) are a very attractive inclusion in a South African investment portfolio for various reasons, apart from the attractive income yield they offer. These range from the diverse characteristics of the global listed property environment to the particular benefits of accessing global REITs through unit trust structures.

Global REITs offer South African investors far more comprehensive regional and sectoral property exposure than they can obtain locally. Some of the best REIT opportunities can be found in the US, Japan, Germany, Singapore and other markets. Global REITs tend to concentrate their portfolios in leading international cities such as New York, London, Paris, Berlin, Tokyo, Hong Kong and Sydney, where high land prices present a significant barrier to entry for small investors.

There is also a wide variety of property sub-sectors and specialisations available in offshore markets, unlike the limited range available in SA. Offshore, the choice includes logistics, healthcare, self-storage, data centres, cellular towers, hotels & casinos, Specialty Health Care accommodation and more. The regional and sectoral depth of developed market REITs adds a significant layer of diversification to a South African investment portfolio.

Global REITs are a great way to invest in specific, long-term secular growth trends – such as online business, mobile technology and demand for better healthcare for ageing populations – as well as to benefit from fast-evolving trends in the way societies live, work and shop. For example, the massive growing demand for digital and cloud infrastructure has led to the emergence of listed Data Centre REITs like Equinix & Digital Realty. These companies have adeptly positioned their portfolios to benefit from the increasing growth of global tech firms.

With so much choice, identifying opportunities and embracing shifting trends can be difficult without the right expertise. Nicolas Lyle, Senior Analyst for the STANLIB Global Property fund, says it’s profitable to be able to take advantage of global sectoral trends by shifting allocation between sub-sectors and geographies. Over the past two years, the STANLIB Global Property Fund has shifted some of its US offshore retail focus to logistics and warehousing, in line with consumer retail trends towards online shopping. More recently, in the wake of political unrest in Hong Kong, the benefit of active management was evident in the fund’s down-weighting of the region in favour of other, more stable jurisdictions.

REITs are exempt from corporate income tax, so income is only taxed in the hands of the end investor. However, there is an additional advantage to investing in an accumulating global property unit trust, since dividends are not distributed in the fund but are ‘rolled up’ into the unit price. Investors do not pay income tax on any distributions, only capital gains tax (CGT) on the final total return.

REITs have both bond and equity characteristics. They earn attractive income, like bonds, but trade as equities, which entails additional risks. They complement a traditional mix of assets, giving investors uncorrelated, liquid access to stable income and competitive total returns.