Ceteris Paribus: REITs and stocks: which way to go?

This is opposed to the stock valuations on ZSE, which are at an all-time low due to currency fragility, thus seeing company fundamentals failing to match up to market valuation.

FOLLOWING the recent publication of half-year financial results by Tigere Property Fund pertaining to the Zimbabwe Stock Exchange (ZSE) listed REIT, there has been mixed reactions on which is a better investment option between real estate investment trusts (REITs) and stocks.

Tigere reported a total net property income of US$861 949 in the six months to June 30. However, what captivated most is the declared dividend of US$255 202 consisting of US$218 087 (being 0.03 United States cents per unit) as well as an additional ZW$167 651 585 (being 23.30 Zimbabwe cents per unit).

This comes at a time financial markets are fast-turning profits into losses, in real terms, due to currency crisis, which has affected valuations. Additionally, Tigere registered a net asset value of US$22 527 639 in the six-month period, which pars its stock market capitalisation of ZW$143,9 billion or US$22,2 million against the parallel exchange rate, which typically drives the market sentiment.

This is opposed to the stock valuations on ZSE, which are at an all-time low due to currency fragility, thus seeing company fundamentals failing to match up to market valuation.

On another note, the regulatory requirement that REITs have to pay out nearly all of their profits  as dividends has attracted an increase in investor appetite. However, it is worth interrogating the difference or relationship between REITs and stocks.

REITs, as the name suggests, are investment vehicles that allow individuals to invest in real estate properties without directly owning them.  Essentially, by investing in a REIT, you are pooling your money with other investors to purchase income-generating properties, such as commercial buildings, apartment complexes, or shopping centres like the Highland Park under Tigere.

In return, investors receive dividends, which are often higher than those of traditional stocks. REITs provide an opportunity for regular income, diversification, and potential tax benefits due to their required payout of at least 80% of taxable income to shareholders. On the other hand, stocks represent ownership shares in a company or corporation. When you invest in stocks, you are buying a portion of the company's ownership and are entitled to share in its profits.  Stocks offer potential capital appreciation as the company's value grows, and they can be easily bought and sold on stock exchanges. They also provide investors with the opportunity to diversify their investment portfolios by investing in multiple companies across various sectors and industries.

Determining the best investment option between REITs and stocks depends on various factors, such as your risk tolerance, investment goals, and financial situation.

REITs are generally considered to be less volatile than stocks, which typically experience higher fluctuations in price. However, while stocks may present higher risks, they also offer the potential for higher returns, especially for companies experiencing significant growth. Furthermore, if you prioritise consistent income generation, REITs may be a more appealing choice. As mentioned earlier, REITs are legally obligated to distribute a significant portion of their income as dividends, making them an attractive investment for income-seeking investors.

Both REITs and stocks offer diversification benefits, but in slightly different ways. REITs allow investors to diversify their portfolios by allocating funds across multiple real estate properties or sectors, reducing the risk associated with investing in a single property. 

Stocks, on the other hand, allow investors to diversify their holdings by investing in companies across different industries and sectors. Consider the prevailing market conditions before deciding which investment option best suits your goals.

During periods of economic stability, stocks may outperform REITs due to market-wide growth. However, when the real estate market is thriving, REITs tend to outperform stocks.

In perspective, with the ZSE performing at a year-to-date loss of -5% in USD terms due to currency volatility, REITs prove to be resistant to such economic shakedowns.

  • Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma_


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