Lecture 7 (Chapter 2). Bonds, ETF and REIT

How to Analyze a Bond

A quick recap, then going deeper

Lecture 2 introduced the core distinction: a bond makes you a lender, not an owner, with a fixed face value repaid at maturity plus regular coupon payments along the way. This lecture builds on that foundation with the tools needed to actually evaluate a specific bond as an investment.

Yield to Maturity: the number that actually matters

The coupon rate printed on a bond is fixed at issuance, but bonds trade on the secondary market at prices that move. Meaning what a new buyer actually earns depends on the price they pay, not just the stated coupon. Yield to Maturity (YTM) solves this: it's the total annualised return an investor can expect if they buy the bond today at its current market price and hold it until maturity, accounting for both the coupon payments and the difference between the purchase price and the face value received at maturity.

This is why two bonds with an identical coupon rate can offer very different actual returns to a new buyer, depending purely on what price each is currently trading at.

Why bond prices move opposite to interest rates

This is the single most important mechanic to understand, and it follows directly from Lecture 4.2's discussion of interest rates:

Imagine you hold a bond paying a 8% fixed coupon. If the SARB then raises rates and newly issued bonds start offering 9% coupons, your older 8% bond is suddenly less attractive to a new buyer. Why would they pay full face value for your bond when a brand-new one pays more? For your bond to remain competitive on the secondary market, its price must fall enough that its effective yield to a new buyer rises to match the new market rate.

The reverse happens when rates fall: an older bond with a relatively attractive fixed coupon becomes more desirable, and its price rises. This inverse relationship between bond prices and interest rates holds for essentially every fixed-rate bond, and it's the reason bonds are not the "risk-free, price-never-moves" instrument beginners sometimes assume. Their income is fixed, but their market price is not.

Duration: how sensitive is this particular bond?

Not all bonds react to rate changes by the same amount. Duration (a related but more precise concept than simple maturity) measures roughly how sensitive a bond's price is to interest rate changes. As a general rule: the longer a bond's remaining time to maturity, the more its price moves for a given change in interest rates. A bond maturing in 2 years will barely flinch at a 1% rate move; a bond maturing in 20 years can see a substantial price swing from the same rate change. This is why investors who want to minimise interest-rate-driven price swings often favour shorter-maturity bonds, while those willing to accept more price volatility in exchange for typically higher yields choose longer-dated ones.

Credit ratings: how likely is the issuer to actually pay you back?

Beyond interest rate risk, every bond carries credit risk. The possibility the issuer fails to make coupon payments or repay the face value at all. Independent agencies - Moody's, S&P Global, and Fitch assess this risk and assign credit ratings, broadly split into two tiers: investment grade (considered relatively low default risk) and sub-investment grade (often called "junk" or "high-yield," carrying meaningfully higher default risk, and typically compensating investors with a higher yield for taking on that risk).

South Africa's own sovereign credit rating is a live, useful example right now. As of mid-2026, all three major agencies rate South Africa two notches below investment grade - Fitch and S&P both at 'BB', Moody's at 'Ba2' but the trend has genuinely turned: Fitch upgraded South Africa's rating in June 2026, its first upgrade of the country in almost 21 years, citing prudent fiscal management, following S&P's own one-notch upgrade to 'BB' (foreign currency) in November 2025, with Moody's and S&P both maintaining a positive outlook, suggesting further upgrades remain possible over the next 12 to 18 months. This context matters directly for RSA government bonds: a genuine move back toward investment grade would likely be reflected in lower government borrowing costs (and, by the inverse price-yield relationship above, higher prices for existing RSA bonds) while a reversal of this trend would work the other way.

Where South African investors can actually access bonds

• RSA Retail Savings Bonds purchased directly from National Treasury, not tradable on any exchange, available as either Fixed Rate (locked-in coupon) or Inflation-Linked (coupon adjusts with CPI, protecting real purchasing power) bonds. Designed for individual savers who intend to hold to maturity, since they can't be sold on to another investor before then.
• JSE-listed bonds both government and corporate bonds trade on the JSE's debt market, accessible through a stockbroker just like a share, meaning they can be bought and sold on the secondary market at whatever price current conditions imply, rather than only held to maturity.
• Bond ETFs and unit trusts - for investors who want bond exposure without picking individual issues, funds holding a basket of bonds are widely available (we covered this fund structure generally back in Lecture 2.3).

Putting it together: what to actually check before buying a bond

1. Yield to Maturity - not just the coupon rate — tells you the real expected return at today's price.
2. Time to maturity / duration - tells you how much the bond's price could swing if rates move before you'd otherwise sell or hold to maturity.
3. Credit rating of the issuer - tells you how much default risk you're taking on, and whether the yield on offer adequately compensates for it.
4. Inflation-linked vs fixed - for South African investors specifically, worth considering given the country's history of currency and inflation volatility discussed in earlier modules.

Key takeaways

• Yield to Maturity, not the stated coupon rate, is the true measure of a bond's return to a buyer at today's market price.
• Bond prices move inversely to interest rates: rates up, existing bond prices down, and vice versa.
• Longer-maturity bonds are generally more sensitive to interest rate changes than shorter-maturity ones.
• Credit ratings (Moody's, S&P, Fitch) gauge default risk; South Africa currently sits two notches below investment grade across all three agencies, though with a recently improving trend as of 2025-2026.
• South African investors can access bonds via non-tradable RSA Retail Savings Bonds, JSE-listed bonds through a broker, or bond funds/ETFs.

ETFs and REITs: Different Layers of Property Exposure

Where REITs fit into what you've already learned

Lecture 13 introduced funds broadly - pooled vehicles like unit trusts and ETFs. A REIT (Real Estate Investment Trust) is a different kind of animal: not a fund in the traditional sense, but a listed company that owns and operates income-producing property directly - office blocks, shopping centres, warehouses, storage facilities and passes most of the rental income straight through to shareholders.

What makes a REIT a REIT, legally

South Africa formalised the REIT structure in its Income Tax Act in 2013, and to carry REIT status on the JSE, a company must meet specific, binding requirements: owning property investments of at least R300 million, deriving at least 75% of its income from rental or property investment activity, distributing at least 75% of its distributable taxable earnings to shareholders each year, and keeping its gearing (debt-to-asset ratio) below 60%.

That mandatory 75% distribution requirement is the key structural feature investors care about. It's why REITs typically offer higher, more consistent income yields than ordinary shares: the law essentially forces the company to pay out the bulk of what it earns rather than retaining it for reinvestment.

The tax trade-off that makes this work

In exchange for meeting these requirements, REITs get favourable tax treatment: REITs do not pay corporate income tax on the income they distribute, and investors do not pay dividends withholding tax on REIT distributions. Instead, investors pay income tax on those distributions at their own marginal tax rate. This is a meaningfully different tax treatment from an ordinary share dividend (which is typically subject to Dividends Withholding Tax at source), and it's worth understanding before assuming a REIT's headline yield behaves identically to a dividend yield from an ordinary JSE company. The after-tax outcome depends on your personal marginal tax rate rather than a flat withholding rate.

Individual REIT vs. a property ETF: concentration vs. diversification

This is where the two instruments from this lecture's title connect directly. Buying shares in a single REIT - say, Growthpoint Properties, South Africa's largest, gives you exposure to that specific company's property portfolio, tenants, and geographic concentration. It behaves, in terms of concentration risk, like buying an individual share: if that particular REIT has an unusually large exposure to, say, office space in a weak rental market, your return is tied directly to that outcome.

A property ETF, by contrast, holds a basket of many listed REITs and property companies at once. The Satrix Property ETF (JSE: STXPRO), for example, tracks a market-cap-weighted property index capped at 10% per constituent to prevent any single company from dominating performance, and is made up predominantly of diversified REITs like Growthpoint, alongside names such as NEPI Rockcastle. Buying this ETF spreads your property exposure across the sector rather than betting on one company's specific portfolio. The same diversification logic covered for ETFs generally back in Lecture 2.3, just applied specifically to property.

For investors wanting property exposure beyond South Africa's borders, JSE-listed feeder ETFs also exist that track global property indices, giving rand-denominated access to international real estate markets in a single trade.

Choosing between the two, practically

• A single REIT suits an investor who has researched that specific company's property portfolio, tenant quality, and management, and is comfortable with concentrated exposure to its particular strengths and risks, much like choosing an individual share over a broad index fund.
• A property ETF suits an investor who wants exposure to the property sector's income characteristics broadly, without needing to evaluate each underlying REIT individually. Trading some potential outperformance for reduced company-specific risk.

Many investors do both: holding a property ETF as a core sector allocation, while adding a specific REIT they've researched and have particular conviction in. The same "core-and-satellite" logic that applies to fund investing generally.

Key takeaways

• A REIT is a listed company that owns income-producing property directly and is legally required to distribute at least 75% of its taxable earnings, with at least 75% of its income coming from rental activity and gearing capped below 60%.
• REIT distributions are taxed as ordinary income in the investor's hands at their marginal rate, not subject to Dividends Withholding Tax. A meaningfully different tax treatment from standard share dividends.
• A single REIT carries company-specific concentration risk, similar to an individual share; a property ETF diversifies that risk across many REITs at once.
• JSE-listed property ETFs (local and global feeder funds) let investors access the property sector broadly, without evaluating each underlying REIT individually.
• Combining a broad property ETF with a specific, researched REIT is a common way to balance diversification with conviction.