Get listed

Posted On Thursday, 16 September 2004 02:00 Published by eProp Commercial Property News
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Those of us with debt to pay off will be sleeping easier thanks to the cheaper money that Reserve Bank Governor Tito Mboweni's interest-rate reductions have brought this past year.

Tito MboweniBut lower rates have changed the picture for South Africans used to the days of getting double-digit interest on their savings.

However, in a lower interest-rate environment, there is a sector that can still provide you with an increasing amount of income: listed property.

Mariette Warner, the head of Specialist Funds at Standard Bank Properties, says listed property performs well in a low-interest-rate environment and that the fundamentals for listed property are improving.

Rentals are on the rise again after several years of stagnation, and the retail sector is particularly hot.

Listed property comprises companies that are involved in retail, office and industrial real estate.

These companies largely have high dividend yields, but their distributions are considered income and are thus taxable, unlike the dividends of other companies.

Evan Robins, fixed income analyst at BoE Private Clients, says distributions - the income that property loan stocks and property unit trusts pay their shareholders and unit-holders - are now growing, after a period of stagnation.

Robins says even a 2% annual increase in distributions can make a big difference over time to the amount investors receive.

Listed property should give investors an annualised yield "of at least 11.5%" in future, Robins says.

Warner forecasts a yield of about 10.8% for the next 12 months, far higher than the 7% yield available from high-interest vehicles such as money market funds.

Like ordinary shares, there is a capital consideration to listed property.

David Green, head of research and investment management at independent financial planners acsis, says although investors can still get a good yield out of bonds, a key difference between property and bonds is that listed property gives you the probability of capital growth.

Green says investors can expect an annual average total return of about 13% (before tax and fees) from listed property for the next three to five years. This compares with about 9.5% forecast for bonds.

Warner says she expects capital to be stable to slightly weaker during the next year depending on the outlook for bonds and interest rates, but still expects a total pretax return of 14% to 15% a year.

Green puts listed property between bonds and equities in terms of expected return, but there's still a risk.

"People invest with their eyes firmly fixed on the rear-view mirror. Returns going forward are not going to be the spectacular returns we've seen in the past," Green says.

Investors should not look at listed property as an isolated asset class, he says. It has a role to play in a diversified portfolio. However, property has a relatively low correlation with the movements of other asset classes so, by including it, you limit the risk in your portfolio.

However, Green doesn't recommend allocating more than 20% to property in your investment portfolio. He points out that it is crucial to structure your investments properly. In a retirement annuity, for instance, you will be taxed at 18% - a lower rate than the tax on income.

But buying a second residential property to let it out is probably far more familiar to investors, so how does listed property compare?

Robins says investors in listed property can earn double the yields of residential property without administrative hassles.

Residential property is "an illiquid, high-maintenance asset with very high entry-level costs, large transaction costs, rates and taxes, maintenance spending and high idiosyncratic risks [such as one's tenant defaulting on rent]," Robins says.

"As a financial asset, a house is only worth the future rents you can earn from it," Robins says. "As an investment it is not optimal. You can do far better elsewhere and with less risk."

Green says an obvious advantage of listed property is that you can pick up listed property counters "in bite-size chunks", so there is no need to take out a R200 000 or R300 000 bond.

Unit-trust companies offer funds that invest in listed property, though some of these have closed recently.

According to Liz Still, editor of EQUINOX.co.za, the following funds are still open to new investment: Coronation Property Equity Fund, Oasis Property Equity Fund, Blue Horizon Property Income Portfolio, Old Mutual SA Quoted Property Fund, RMB Property Fund, Sanlam Property Fund, Stanlib Multi-Manager Property Fund (A class) and the Metropolitan Property Absolute Income Fund.

 

Last modified on Monday, 12 May 2014 16:29

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