Real Estate Investment Trust (REIT) Analysis: Making Informed Investment Decisions in Zimbabwe’s Property Market

Real Estate Investment Trust (REIT) Analysis: Making Informed Investment Decisions in Zimbabwe’s Property Market

The introduction of Real Estate Investment Trusts (REITs) has transformed Zimbabwe’s property investment landscape, offering investors a way to invest in real estate without directly owning properties. As REITs like Tigere and Revitus grow on the Zimbabwe Stock Exchange (ZSE), understanding how to analyze these investments becomes essential for all investors.

Legal Status and Regulatory Framework

In Zimbabwe, REITs operate under a comprehensive legal framework established by several key pieces of legislation. The Collective Investment Schemes Act (Chapter 24:19) provides the primary regulatory foundation, while the Securities and Exchange Act (Chapter 24:25) governs their listing and trading. The Finance (No. 2) Act of 2020 introduced specific REIT provisions, including tax benefits.

To qualify as a REIT, entities must meet strict criteria:

·        Register with the Registrar of Collective Investment Schemes

·        Maintain at least 100 shareholders after the first year

·        Ensure no more than 50% of shares are held by five or fewer individuals

·        List on a registered stock exchange like the ZSE

·        Have assets of at least US$1 million

·        Maintain at least 30% public shareholding (20% if private placement preceded IPO)

This regulatory framework provides investor protection while offering tax advantages that make REITs attractive investment vehicles.

Understanding REITs in Zimbabwe: A Simple Guide

Think of a REIT as a company that owns and manages income-producing properties on behalf of investors. In Zimbabwe, REITs must:

·        Earn at least 80% of their income from real estate

·        Pay out 80% of their earnings to investors

·        Be listed on the stock exchange

For example, Tigere REIT owns Highland Park Mall and Chinamano Corner, collecting rents from shops and offices, and then distributing most of this income to its investors.

How to Evaluate REITs: Key Metrics Explained

1.      Funds from Operations (FFO)

Let us use a simple example: Suppose a REIT owns a shopping center that:

·        Earns US$100,000 in annual rent

·        Pays US$40,000 in operating costs

·        Records US$20,000 in depreciation (a paper expense)

FFO calculation: Net Income (US60,000)+Depreciation(US20,000) = FFO US$80,000

This US$80,000 better represents the actual cash available to pay investors.

2.      Adjusted Funds from Operations (AFFO)

Continuing our example: If the shopping centre needs US10,000 annually for maintenance: FFO(US80,000) - Maintenance Costs (US10,000) = AFFO US70,000

This US$70,000 shows what the REIT can pay to investors after keeping the property in good condition.

3.      Net Asset Value (NAV)

If our shopping center is worth US$1 million and the REIT has:

·        Property value: US$1,000,000

·        Cash: US$100,000

·        Debt: US400,000 NAV= (US1,000,000 + US100,000-US400,000) = US$700,000

If the REIT has 700,000 units, each unit’s NAV would be US$1.

Property Portfolio Assessment

When analysing Zimbabwe’s REITs, examine:

Location Quality

For example, Revitus REIT’s properties in Borrowdale attract higher-paying tenants than similar properties in less prime areas.

Tenant Quality

A REIT with major retailers as tenants on 5-year leases offers a more stable income than one with smaller shops on yearly leases.

Occupancy Rates

Tigere REIT’s 100% occupancy means all spaces are earning rent, maximizing income potential.

Currency Mix

REITs earning mostly USD rentals, like Tigere REIT, offer better protection against ZWL depreciation.

Market Environment

Zimbabwe’s retail property sector shows strength with:

·        CBD shops earning US$20-25 per square metre

·        Suburban locations earning US$15-20 per square metre

·        Strong demand for quality retail space

Management Evaluation

Look at the management team’s:

·        Past successes in property development

·        Plans for growing the REIT

·        Track record of maintaining properties

·        History of delivering investor returns

Risks and Opportunities

Key Risks:

·        Economic challenges affecting tenants

·        Currency changes impacting returns

·        Limited buying and selling of REIT units

·        Changes in property laws

Opportunities:

·        Regular income from rents

·        Professional property management

·        Easy way to invest in property

·        Protection against inflation through USD rents

Frequently Asked Questions

Q: How much money do I need to invest in Zimbabwe REITs? A: You can start by buying one unit on the ZSE, making it affordable for most investors.

Q: What taxes do I pay on REIT income? A: 10% tax on distributions and 1.5% when selling units.

Q: Can my pension fund invest in REITs? A: Yes, pension funds can own up to half of any REIT’s units.

Q: How do REITs protect against inflation? A: Most charge USD rents and regularly review rental rates.

Conclusion

Zimbabwe’s REIT market offers an accessible way to invest in property through regulated, professionally managed vehicles. While the market is still young, REITs provide an attractive option for investors wanting to participate in Zimbabwe’s real estate sector without the complexities of direct property ownership. Understanding these evaluation metrics helps make informed investment decisions in this growing market.