Investing in real estate companies — the next best thing after a mortgage

“HOW can I earn rental income when I can't even afford a mortgage for myself? NHT only lends up to $6.5 million, and there are no houses available for that price!”

If this is you, then there is a solution. You can combine the benefits of real estate investing with stock market investing. Real estate can be very expensive for a beginner, so you can get some of the benefits of real estate investing on a smaller budget by investing in real estate companies that are listed on the Jamaica Stock Exchange.

There are nine companies on the JSE that are heavily involved in real estate investment. By investing in them, you can be a part owner of the commercial or residential properties and hotels they own. These companies are 138 Student Living, Eppley Caribbean Property Fund, First Rock Capital Holdings, Kingston Properties Limited, PanJam Investment Limited, PROVEN Investments Limited, Pulse Investments Limited, Sagicor Real Estate XFUND, and Stanley Motta Limited.

Real Estate Investment Trusts (REITs)

Because of their exposure to real estate, you may hear some of these companies described as REITS, real estate investment trusts. For example, PROVEN Investments has PROVEN REIT. However, in Jamaica, there are no REITs in the true definition of the term. In the United States, for a company to be classified as a REIT at least 75 per cent of its income must be from real estate, 75 per cent of assets must be invested in real estate, and at least 90 per cent of taxable income must be paid out in dividends. There are also tax benefits in the US to registering as a REIT. No corporate income tax is paid on income that is distributed as dividends. This results in REITs having to pay little to no corporate income tax.

This is not so in Jamaica. A REIT is not legally defined in Jamaica so there are no tax benefits to be gained, but there are many other benefits to investing in real estate companies listed on the local stock exchange. Here is a brief look at some of the real estate companies on the JSE.

138 Student Living (138SL)

Through 138SL, you can own student accommodations. In 2014 the company signed a 65-year concession agreement with UWI Mona to design, finance, construct and operate nearly 1600 units to rent to students. 138SL now earns rental income from rooms on the Leslie Robinson Hall Phase 2, Irvine Hall and the Gerald Lalor Flats (better known as postgrad to UWI students).

What's special about the concession agreement is that UWI has given 138SL a guarantee of 90 per cent occupancy. This means that if, for any month, occupancy is anything less than 90 per cent, UWI has to make up for the shortfall by paying 90 per cent of the rental income that was expected, or make up the balance of rental income to ensure that at anytime, 138SL rental income is equivalent to what would have been collected if the units were at 90 per cent occupancy. This surely came in handy last year when COVID-19 resulted in most students leaving campus and engaging in remote learning. In fact, the pandemic is still affecting occupancy, so shareholders must be grateful for this provision. The company's net profit for the 2020 fiscal year was $316 million (US$2.1 million).

Eppley Caribbean Property Fund Limited SCC - Value Fund (CPFV)

This company owns sixteen commercial properties in Jamaica, Barbados and Trinidad. These include Mall Plaza on Constant Spring Road, Empire Shopping Centre in Crossroads, and Hastings Business Centre in Barbados. CPFV gives its shareholders a chance to own landmarks on the three major English-speaking islands in the region.

CPFV's dividend policy states that it aims to pay out between 75 per cent to 100 per cent of rental income after accounting for expenses, taxes and mortgage payments. On May 14 CPFV declared a dividend of 0.8 Barbados cents or 0.4 US cents. For the 2020 fiscal year, the fund realised a net profit of approximately US$1 million. The company is registered in Barbados and was first listed on the Barbados Stock Exchange, so revenue is reported in Bajan dollars.

Kingston Properties (KPREIT)

Another example of a company on the Jamaica Stock Exchange that earns rental income from owning commercial properties is Kingston Properties. KPREIT owns a mix of residential and commercial properties in Jamaica, Florida, USA and the Cayman Islands. Their residential properties include condo units at the Loft II Building in Downtown Miami and at the Midblock Condominiums in midtown Miami. Commercial properties include Spanish Town Road commercial complex, the Grenada Crescent office building in New Kingston and Harbour Centre Building in the Cayman Islands. The company also regularly pays out dividends to its shareholders. For the 2020 fiscal year, KPREIT realised a net profit of approximately US$613,000.

First Rock

How do luxury apartments and townhouses sound? While you may have to wait some years to purchase one on your own, you can be a part-owner of luxury apartments by owning shares in First Rock Capital Holdings Limited. First Rock owns commercial and luxury residential properties in Jamaica, the Cayman Islands, the US and Costa Rica. They also own a lot of land for development. Along with rental income, the company generates revenue from investing in private equity and other financial instruments.

First Rock is currently building 12 stand-alone homes on land off Wellington Drive across from the US Embassy. Ground was just broken last week for the luxury development, Hambani Estates. Each home will include a swimming pool and double master bedrooms. First Rock also announced recently that it entered into a partnership to construct a 160-room complex in Costa Rica. The company had net profit of US$2.6M for its 2020 fiscal year.

PROVEN Investments

PROVEN Investments is another company that gives shareholders exposure to luxury apartments. PROVEN owns three rental income properties at Newport West and Portmore Pines, and six properties in various stages of development that will be sold once completed. These include apartments and villas on Braemar Avenue and Millsborough Avenue in Kingston. For the 2020 fiscal year PROVEN real estate earned net profits of US$2.36 million, which accounted for 8% of the group's net profit.

Sagicor Real Estate X Fund

The last company we will look at is Sagicor Real Estate X Fund. This fund allows you to own hotels. Sagicor Real Estate X Fund currently owns shares in DoubleTree by Hilton in Orlando, Florida, and units in Sigma Real Estate Portfolio. Due to its heavy exposure to tourism in 2020, the X Fund experienced huge losses for the 2020 fiscal year. In January this year, X Fund sold its shares in Playa Hotels and Resorts to cut losses and hopefully improve the performance of the X Fund. Has it worked? Well, for the first three months of 2021, X Fund had a net loss of $203 million compared to net losses of $4.5 billion for the same period in 2020.

Benefits of investing in real estate companies

There are many other real estate companies, so do some research to find a company with properties that you would like to own. By owning shares of these companies, without the stress of being the sole owner you can get all the benefits listed below:

• Diversification in terms of geography and type of property as commercial or residential, or a mixture of both.

• Tenants will not be calling you at night to fix a broken water pipe or a leaking roof. The companies usually hire property managers to do this.

• Real estate companies usually have a higher dividend yield than other listed companies. This is because after collecting rent and settling expenses including debt service payments, the income remaining is often distributed to shareholders. If they want to purchase additional properties, these companies tend to either raise money from issuing additional shares or use debt to fund property purchase.

If you cannot afford a mortgage, investing in real estate companies could be the way to go. All the benefits without the hassle.

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