Listed property outlook attractive

Posted On Wednesday, 11 January 2006 02:00 Published by eProp Commercial Property News
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There is still very much a place for listed property in the form of property loan stocks and property unit trusts in one's portfolio - particularly if one is looking for increased income.

Property-Housing-ResidentialWhile growth rates in residential property are expected to decelerate in 2006, a positive outlook for commercial property as well as the prospect of lower local interest rates means that there is still very much a place for listed property in the form of property loan stocks (PLS) and property unit trusts (PUTs) in one's portfolio - particularly if one is looking for increased income.

The combined market capitalisation of the PLS and PUT sectors of the JSE has mushroomed to around 57 billion rand from five billion rand five years ago.

Sasfin Frankel Pollak Securities consultant David Shapiro said that the outlook for listed property was fairly positive and that it was likely to outperform the bond market in 2006.

"Even though residential property might be coming to the end of its cycle, I don't think this will affect commercial, industrial and retail property, which will continue to benefit from the expanding economy and continued increased rental returns," he asserted.

"As long as interest rates are not going to rise, they will not drag down the sector."

According to the Property Loan Stock Association (PLSA), one of the most attractive qualities of property loan stocks is that earnings can be projected with a fair degree of accuracy as a result of contractual rental income from the property assets.

Investment in listed property is also easier than buying a property as an investment, requiring less money and no long-term mortgage bonds.

Listed property shares offer a geographical spread of properties across the entire country and therefore carry less risk than buying a single property, the PLSA says. They also have the advantages of liquidity and tradability.

Shapiro says that listed property is a sound investment for anyone who wants to improve yields and who wants exposure to that sector. However, tax must be taken into consideration.

Although property stocks have a higher yield than equities - the yield on the PLS index is currently 7.42% while the yield on the PUT index is 6.85%, compared to a yield of 2.35% on the JSE's all share index - distributions on listed property stocks are taxable while dividends are not.

This is because the income from PLSs and PUTs is taxed in the hands of the investor and not in the hands of the company.

"Listed property receives rental income. It passes on nowhere the kind of growth a business might have. Listed property delivers more or less a fixed return. People buy these stocks for yields, but they do make capital growth over time," Shapiro says.

This has especially been the case over the last couple of years.

"Yields have come down from the region of 12%-13% to around 8%, so people have made exceptional capital profits."

Sasfin is forecasting annual average distribution growth from the listed property stocks of between 8% and 9% over the next two years.

Dawie Roodt, chief economist at the Efficient Group, agrees. He says that while he is bullish on bonds, there is a good chance that listed property will outperform the bond market.

"We have increased our exposure to bonds for two reasons. The first is the small fiscal deficit. It will be even lower than the minister (of finance) said - which has supply implications. The second reason is (low) inflation."

Roodt says that commercial property tends to lag residential.

"Residential property has had its run and retail property, office blocks and industrial property usually follows," he explains.

With interest rates likely to come down, listed properties' yields should become even more attractive relative to cash, which is Roodt's second reason such stocks have a place in one's portfolio.

The PLS index has historically had an inverse relationship with the prime rate.

Last modified on Thursday, 08 May 2014 18:05

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