Diversification vs focused portfolios

Posted On Wednesday, 13 June 2001 03:01 Published by eProp Commercial Property News
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And the rule for predictable long-term returns is a sizeable, diversified portfolio, says an expert RETURNS on property unit trusts continued to outstrip returns on physical property last year, says John Rainier, vicechairman of the Association of Property Unit Trusts.

Property-Housing-ResidentialThe SA Property Information Exchange-IPD (Sapix-IPD) index this measures returns on direct investment property reported total returns on all property in SA last year at 11,3% , against 13,7% in 1999.
While the performance of the property market is primarily dependent on economic growth, which drives the demand for space, the office, retail and industrial sectors of the physical property market respond differently to economic fundamentals, he says.
Office market rentals tend to lag the business cycle by 12 to 18 months.
According to the Sapix database, offices emerged as the strongest of the three main categories, with total returns of 12,8%.
Retail rentals, which contain an element of turnoverbased income, are driven by economic growth as well as consumer spending, which responds more readily to lower interest rates, increases in disposable income, tax cuts and lower fuel prices.
Retail properties generated total returns of 10,5% last year.
Industrial properties realised an average return of 7,2%, after being influenced by growth in the manufacturing and distribution sectors, which are driven by consumer and export demands.
The performance of property unit trusts often reflect the mix of property within the portfolio and the stimuli that influence these sectors.
International trends have shown that the debate centres on sector-specific versus diversified portfolios, says Rainier. Focused funds are often more predictable, as investors can apply economic fundamentals to the sector to make informed decisions.
'It is easier to receive predictable long-term returns from a sizeable, diversified portfolio, as opposed to one that focuses on a specific sector such as retail or industrial.
'After a long retail boom, the sector is now coming under pressure, and having other sectors in a portfolio lowers the risk of higher vacancies in retail,' he says.
'At the same time, a diversified portfolio can take advantage of depressed sectors, such as our industrial one ,' says Rainier.

Last modified on Wednesday, 23 April 2014 12:25

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