AS SA’s inflation levels and listed property yields move closer to levels in first world countries, investors in local listed property funds now have an opportunity to diversify their investments into foreign listed property markets.

Andre Stadler, MD of Catalyst Securities, says South African- listed property yields are moving closer to their global counterparts as local inflation levels fall and local property fundamentals improve.

Stadler says South African- listed property yields have strengthened over the past two years, with the yield on the South African listed property index moving from 12,2% to 8,5%.

He says the Australian retail-focused property fund Westfield, for example, has a market capitalisation of about A$27,5bn and is trading on a forecast yield of about 6%, with growth prospects on that income stream of about 4%-5%.

By comparison, he says, Hyprop is trading on a forward yield of about 8%.

"That differential has narrowed significantly. The issue becomes investors’ appetite for risk," says Stadler.

He says because SA’s listed property yields are moving downwards in line with overseas funds, there could be opportunities for some of the local investor base to consider overseas investments with less dilution than they experienced in the past.

"South African investors could invest in foreign listed companies to diversify their investments. Global options are increasing continuously with listed (property) sectors growing globally."

Stadler says the traditional listed property markets include the US and Australia.

Newer markets include Singapore and South Korea, while Hong Kong is close to launching its own listed property sector.

Angelique de Rauville, MD of listed property portfolio management company Provest, part of the Investec Property Group, says her company is also aware that a couple of South African listed property funds are considering investing beyond SA’s borders.

De Rauville says MICC Property Income Fund is the only listed fund out of all the South African property unit trusts and property loan stock companies that is listed outside SA.

MICC has a joint listing on the Namibian Stock Exchange and owns Namibian properties.

De Rauville says Provest would support other listed property funds or companies wanting to invest in foreign properties as long as the investment was earnings-enhancing and did not expose unitholders to currency risk.

"Other than that we would support it because it improves diversification and is an opportunity for listed funds to increase their market capitalisations through growth in the asset base."

De Rauville says this is important for the further development of the listed property sector, given that its total market capitalisation is about R40bn.

She says this market capitalisation is considered small relative to the bourse.

De Rauville says the management teams of property companies and funds are finding it increasingly difficult to source quality properties within SA. Investing abroad would provide South African property funds with the opportunity to buy "crown jewels in other countries".

One reason South African companies and funds have not looked to the overseas market in the past is that SA’s commercial property market has "run very hard with good opportunities" over the past few years, she says.

De Rauville says management teams have been applying resources to taking advantage of these local opportunities.

But Colin Young, fund manager of Old Mutual’s South African listed property funds, says he would discourage South African companies investing in an overseas market.

Young says although it might be in vogue at the moment, with the rand depreciating, he is not in favour of investing in a market that is so different from SA.

He says the UK market, for example, has a different interest rate cycle, different planning regimes and yields of below 4%.

"Plus you are taking on currency risk, which is very difficult to predict, and as a result a diversification could hurt (a South African company)," says Young.

He is in favour of diversification into a foreign market but would prefer to see this through an overseas company taking a secondary listing rather than a South African company thinking it can "crack an overseas, developed market".

For example, UK-based Liberty International has a secondary listing on the JSE Securities Exchange SA and offers South Africans a chance to diversify.