MANY South Africans choose fixed property as an investment because it is relatively simple to understand and avoids some of the tax burdens associated with other investments — but listed property’s virtues have been largely ignored.

The fantastic growth achieved by listed property over the past decade may be slowing, but it still makes an attractive addition to any investment portfolio.

“Listed property has a place in most portfolios, with lower risk than equities and higher risk than bonds. If you invest in equities, listed property should form part of your portfolio, with a minimum of three to five years’ involvement,” said Leon Allison, research analyst at Macquarie First South Securities.

“Listed property is a longterm asset class, but even older people can make use of it. It’s still quite predictable, so those nearing retirement can use it in addition to bonds and cash.”

Evan Jankelowitz, portfolio manager at Stanlib, said listed property was commonly more attractive for conservative investors looking to the growing income stream as a living annuity or to long-term investors looking for inflation protection through the escalating rental stream.

“But the truth is that property should be considered for any diversified portfolio. It really is another basket in which another few eggs could be hidden. As distributions are taxable, unlike dividends, those who can apply their interest exemptions against distribution income or non-taxpaying individuals are well suited to listed property. One should invest through a full property cycle, which is around seven years on average,” he said.

Paul Duncan, portfolio manager at Catalyst Asset Managers, said: “There’s a concentration risk in going with just one company. Though Growthpoint and Redefine represent a large proportion of the market, both have underperformed in the sector lately. There is currently a lot of consolidation occurring in the sector, but I think their dominance in the sector will be diluted because a multitude of other funds are preparing to enter the market.

“It’s good news for investors because there’s likely to be more specialisation and more stocks to choose from — it’s just part of the cyclic nature of the market. New listings will be followed by consolidation again. This phase will help to pinpoint the best performers, and of the potential new listings, I think we’ll see four actually reach the market.

“The bottom line is that if listed property is part of a portfolio to serve retirement purposes, go passive and rely on a professionally managed fund to deliver your required returns,” said Duncan.

“Typically, through a managed portfolio, fees will be taken off the return, so a 9% initial return will become an 8% distribution to you. However, through a brokerage, you’re likely to pay 1% as a fee up front and another fee to get out, so you’d pay R100000 to invest, and R99000 would actually go into the fund.”

A major benefit of listed property is that you aren’t left wondering whether the company you’ve invested in has a generous dividends policy.

“A listed property company is an income fund because it pays out almost all its income, while normal listed companies retain anything up to 80% of their income. Usually property loan stocks distribute all their revenue profits, mainly through debenture interest, with the balance being paid out as a dividend,” said Norbert Sasse, CEO of Growthpoint Properties.

“Distributions are paid as often as quarterly by several property loan stock companies, and at the very least twice during each fund’s financial year. These regular distributions provide a steady cash stream and are taxtransparent. Only Growthpoint Properties offers a distribution reinvestment option, where its investors are given the option to reinvest their distributions in the listed property company instead of taking the distribution pay-out,” said Sasse.

Duncan explained further: “Distributions are treated as interest income, not as dividends, which means they are not tax free — they will be taxed in your hands.”

So, if you need to decide between listed and fixed property as an investment, what should you do?

“Recent upheavals in the market have confirmed the inherent stability of listed property, and earnings can be projected with a fair degree of accuracy. Investing in listed property shares offers a geographical spread of properties across the country,” said Brian Azizollahoff, head of the marketing committee for the Property Loan Stock Association and executive director of Redefine Properties.

“Investment in listed property is easier than buying a property as an investment, as you don’t need as much money, nor are you subject to longterm mortgage bonds.

“You also don’t have to find tenants to pay rentals to get a return on your investment, nor do you have the responsibility of maintaining your property. Furthermore, listed property offers liquidity and tradability, meaning that you can sell your listed property shares easily and quickly.”

Source: Sunday Times