Mention bonds or REITs and most South Africans picture pensioners in golf shirts, armed with cardigans and club gossip. But these income investments aren’t only for the retirement crowd. Here’s how they work and where they fit next to your JSE shares.
By The Money Maze | Listen to the episode: Spotify
If your portfolio is all equities, you’re on a rollercoaster without a seatbelt. Bonds and REITs won’t make it boring, but they add income and a different kind of risk. That’s useful whether you’re 25, 45 or 65.
What is a bond?
A bond is a loan, except you’re the lender. You give money to the government or a company, they pay you interest along the way, and at maturity they repay the capital. No WhatsApp follow-ups, no cousin dodging your calls.
In South Africa you’ll mostly see:
- Government bonds: issued by National Treasury. Lower risk, because the lender is the state.
- Corporate bonds: issued by companies such as banks and big industrials. Higher yields, more risk, because companies can fail.
Every bond has a coupon (the interest it pays), a maturity date, and a yield, which is the return you get at the price you pay today.
Why bond prices move with interest rates
Here’s the bit that catches people out. When interest rates rise, new bonds pay more. Your older bond with a lower coupon now looks like a Nokia 3310 in a 5G world, so its price falls until its yield matches the market. When rates fall, the opposite happens and older bonds become more valuable.
The longer the bond’s maturity, the bigger these price swings. A two-year bond barely flinches; a 20-year bond can move a lot. If you hold a bond to maturity and the issuer pays, you get your capital back regardless. But if you sell early, or own a bond ETF, you’ll feel the price changes along the way.
That’s why the SARB’s repo rate decisions matter so much to bond investors.
What about REITs?
A REIT (real estate investment trust) is a company that owns income-producing property: shopping centres, offices, warehouses, flats. You buy shares on the JSE and get a slice of the rental income, without chasing tenants or fixing burst geysers at 2am.
To keep REIT status, JSE rules require a REIT to pay out at least 75% of its distributable profits to shareholders each year. In return, SARS lets the REIT deduct those qualifying distributions, so the income is taxed in investors’ hands instead of twice.
The JSE has a decent spread of REITs. Growthpoint and Redefine are the big diversified names. Spear focuses on Western Cape property. Vukile combines SA retail centres with a large Spanish portfolio. If you don’t want to pick a landlord, property index ETFs give you a basket.
REITs aren’t bonds
REITs pay income, but they’re shares. Their prices swing with the market, interest rates and property sentiment. Higher rates hurt twice: they raise REITs’ borrowing costs, and they make bond yields look more attractive by comparison. Covid was a painful reminder, when shopping centres and offices emptied and many REITs cut or skipped distributions.
Watch a REIT’s loan-to-value ratio, vacancy rates and how much of its income comes from strong tenants. And compare the share price to net asset value. Our episode on why REITs trade below NAV explains that discount.
How they’re taxed
- Bond interest: taxed as income, but individuals get an annual interest exemption, with a higher limit from age 65 (check SARS for the current amounts).
- REIT distributions: exempt from dividend withholding tax for SA residents, but taxed as income at your marginal rate.
- Inside a tax-free savings account or retirement annuity: none of this tax applies.
That last point is why many people hold income investments inside tax wrappers.
How to invest
- RSA Retail Savings Bonds: buy directly from National Treasury via the RSA Retail Bonds website. Fixed-rate and inflation-linked options, no fees, and no price swings because they aren’t traded.
- Bond ETFs: listed funds tracking government bond indices, bought through any share platform.
- REITs: individual shares on the JSE, or a property ETF for the whole sector.
Bonds vs REITs vs equities
- Bonds: lower risk, reliable income. The stable oke at the braai who always brings wood.
- REITs: medium risk, strong income. Your uncle with three properties and three spreadsheets.
- Equities: higher risk, higher long-term growth. The adrenaline junkie.
Together they’re the pap and stew of a portfolio. Not flashy, but they hold it together.
Stokvel Starter Pack
- Bond: a loan to a government or company that pays interest.
- Coupon: the bond’s fixed interest payment.
- Yield: your return at today’s price. Moves opposite to the price.
- REIT: a listed property company paying out at least 75% of distributable profits.
- Loan-to-value: how much a REIT has borrowed against its property.
Takeaway: Bonds and REITs aren’t just for oumas in cardigans. They add income and balance. Just understand what moves their prices before you treat them as “safe”.
Want the full braai version? Listen on Spotify. And if you’d like the Maze in your inbox, join the free Maze Mail list.
More from The Money Maze
- Rebalancing, Asset Allocation and Diversification Explained
- Vukile Sells Spanish Retail Parks: NAV and Dividends
- Why ETFs and REITs Trade Below NAV
- Repo Rate Explained
Sources
- Income Tax Act, section 25BB: Taxation of REITs, Acts Online.
- Interpretation Note 97: Taxation of REITs and controlled companies, SARS.
- RSA Retail Savings Bonds, National Treasury.
- Rates of tax and interest exemption for individuals, SARS.
- Monetary policy, South African Reserve Bank.
This is not financial advice.