How To Pick Your First Winning Property Share
Property is well-known as a great long-term investment.
If investing in physical property isn’t your cup of tea, buying a selection of well-chosen property shares is a fantastic alternative.
So what are your options when it comes to investing on the Johannesburg Stock Exchange (JSE)?
And how can you pick the best property shares for you money?
To discover the answers to these questions, plus a whole lot more, read on…
Property Shares Versus REITS
If you have a look at the JSE’s property sector, you’ll find two main classes of shares…
- Listed property stocks
- Real estate investment trusts (REITs)
Essentially both of these types of shares do the same thing.
They are companies that own property that produces an income. They may also be involved in the management of the property.
Property can include residential, retail and commercial.
The difference between a listed property stock and a REIT is down to the way a REIT deals with tax.
To become a REIT on the JSE, a company must meet the following criteria…
- The value of its property portfolio must be in excess of R300 million.
- It must make a minimum of 75% of its income from its property or indirect property investments,
- Its debt levels must be below 60% of its gross asset value.
- And, it has to return at least 75% of its annual taxable earnings to its shareholders each year.
If a company meets this criteria and achieves REIT status, it is exempt from paying capital gains tax.
But what this means is that you must pay income tax on any dividend payment you receive from REITs you own.
This isn’t the case for listed property or other stocks on the JSE.
Whether you decide to opt for listed property stocks or REITs, you need to know how to find the best ones for your cash.
So how can you do this?
By filtering through what’s on offer and doing some analysis…
Investing In Property Shares Step #1: Look At Dividends
To help you cut through the different listed property shares on offer, a good starting point is dividends.
You can easily compare how different stocks are performing in terms of dividends by looking at their dividend yields.
You can find these online or in the share section of a newspaper.
The higher the dividend pay-out in comparison to a stock’s share price, the higher the dividend yield.
You want to look for a stock that has stable dividends at a decent yield.
This means ignoring the stocks with very high yields as these are unlikely to be sustainable.
Instead look for consistent and stable yields anywhere between 4% and 7%.
By applying this filter to all available stocks, you can whittle your list of possible candidates down.
Investing In Property Shares Step #2: What And Where?
Another very important aspect to look at is a company’s property portfolio.
You’re looking for diversification across both type of property and location.
A well-diversified property portfolio will contain different types of property.
For instance, commercial, retail and residential.
By opting for a portfolio of different property types, it means if there is a slump in a particular property segment, the rest of the portfolio can take up the slack.
You can get an idea of how different types of property are performing by looking at occupancy rates.
The higher, the better.
Location is also important. You want to see a wide spread.
For example, you want to see property in different provinces in South Africa.
Property in prime locations is also a major benefit.
And you could also focus on one or two property shares that have international exposure to their property portfolio too.
This helps to negate country-specific risk.
Investing In Property Shares Step #3: Who’s Making The Decisions?
As with investment in any type of share, you need to pay close attention to the management.
A management team can make all the difference between a good investment and a bad investment.
For property shares you like, scrutinise the management team.
Check out their track records.
It’s vital that management can pick the best investments for the future of the company and its shareholders.
It’s also worthwhile checking if management are significant shareholders in the company and how the board rewards them for good performance.
Management with vested interest can make all the difference.
Investing In Property Shares Step #4: Look At The Numbers
To ensure that a company can continue to grow and pay-out dividends, you must look at earnings.
You want to see how much money it’s making from its operation and how much cash is going to pay outs to shareholders.
By looking at a few years’ worth of accounts, you can see how a company has done and if it’s delivered on its forecasts.
Check out debt levels too. High levels equate to higher levels of risk for you.
Also look at charts of the stocks you like.
You want to see a steady climb in the share price over the years.
Time spent reading through financial statements is well worth it. You will learn so much about a business and you can compare the performances of different stocks.
The Secret To Picking Winning Property Shares
Investing in property shares is for the long-term.
You need to approach your analysis with this in mind.
The property market can be cyclical, so by investing for the long-term you can ride any dips out.
The important thing is investing in the best quality stocks you can find.
Don’t be wooed by sky-high dividend yields. You need to dig deep to find out what’s really going on behind the scenes.
And don’t forget about the tax implications of investing in REITs in terms of dividends.
One way to get by this is to use your tax-free saving account allowance to invest in REITs. Any gains you make are free of tax.
Investing in property shares is a great alternative to investing in bricks and mortar.
Plus, a lot more liquid.
A carefully chosen portfolio of winning portfolio shares will reward you not just in income, but in capital gain too over the years.
Until then, here’s to profitable property investing.
The Money Lab