General property a viable option

Posted On Monday, 22 April 2002 10:33 Published by
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INVESTORS with a taste for property face a roller-coaster ride this year as interest rates climb
INVESTORS with a taste for property face a roller-coaster ride this year as interest rates climb.

However, the drive to see property become a premier investment asset class, competing with equities and bonds, continues.

There has been concern the second wave of rising interest rates in less than five years will throw this course into disarray.

Some investors may be tempted to curtail their exposure to the property market, further reducing the share of investment funds destined for property.

Property's share of total private investment funds is estimated at only 5%, down from about 15% in the early 1980s.

Property economist Francois Viruly says property's share of investment funds will have to increase considerably from its current 5% to assume a meaningful role in investment portfolios.

Viruly believes that the tide is turning and funds destined for the property market will rise. Institutional investors' exposure to property is currently too low and might be readjusted.

But investors may be spooked by the not so pleasing macroeconomic fundamentals. Consumer price index figures for March showed headline inflation moving to 8% year on year from 7,5% in February. It is becoming clear the SA Reserve Bank will miss its inflation target of between 3% and 6%. This makes a third interest rate hike more likely.

High interest rates cause a rise in vacancies, falling rentals, declining capital values, and eventually depressed returns.

What is more worrying, however, is that the cracks in the property industry emerged before interest rates began rising. Vacancies have been on the rise since the start of last year, mainly because of overbuilding. Returns on funds invested in property had already come under pressure.

The 2001 property index figures show property being outclassed by equities and bonds. Last year's property total returns came to 10,5% against 28,3% by equities and 17,7% by long dated bonds.

In 2000, property showed a return of 11,5%, outperforming equities, which showed negative growth of 0,7%.

SA's re-entry into the global market in the early 1990s saw property relegated to the lower league of investment assets. Institutional investors who were overweight on local property suddenly were offered a wider variety of choices, which gave better returns while offering liquidity and flexibility. As institutions dumped property investments, private and small-scale investors have been picking them up, taking advantage of depressed capital values.

The change in the ownership profile has come with some advantages. Private investors tend to realise more value in property assets than institutions have done largely because they put together smaller, easy to manage portfolios.

While equities and bonds might offer liquidity they have become too volatile. Property can therefore serve as a stabilising factor in investment portfolios.

The fast-growing listed property sector of the JSE Securities Exchange SA comes as a bonus. Listed property offers stable income but has also delivered liquidity for the property asset class.

An investor can buy into commercial property in the morning and sell in the afternoon, or buy into retail property and switch to industrial on a whim.

While mainly improving property assets' liquidity, it also mobilises more funds destined for property assets from the small scale trader. The small investor need no longer raise millions to buy into commercial property but with a few thousand rand can buy several units, getting access to the strong rental income stream offered by major com- mercial property portfolios.

The listed property sector has more than tripled its market capitalisation in the past three years to more than R13bn. It is expected to hit R30bn in the medium term. Growth comes through the listing of new property funds and acquisition by the already listed funds.

Listed property comes in two forms, the property loan stock sector and the property unit trust.

The latter is closely regulated with rules that limits its gearing to not more than 30% of a fund's property portfolio value and has stricter terms, regarding management decision making.

The loan stock is loosely regulated with its gearing unlimited. This difference explains why it has grown faster than the property unit trust in the past few years.

In the rising interest rate environment SA is facing, listed property unlike directly held property remains popular as investors chase higher yields. This feature of the sector might help general property, as an investment asset class, sail through this wave of interest rate increases with minimal negative sentiment.

Business Day

Publisher: Business Day
Source: Business Day

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