Listed property has come of age, producing solid returns and diversifying risk. It should be in the investment portfolio of every retirement fund and, in particular, in the investment portfolio of every pensioner.
Property is the “warrior asset class”, Dries du Toit, a financial consultant and former chief investment officer of Sanlam Investment Management, said at the IPD annual property investment conference held in Cape Town this month.
Du Toit says that 90 percent of asset managers have missed out on average returns of 20 percent and more a year over the past decade, simply because they ignored property.
The Alexander Forbes Large Retirement Fund Manager Watch for June 2013 shows that only three percent of retirement fund assets are invested in property.
The listed property sector not only performed well in the context of South Africa, but it also beat property prices in all developed countries.
Du Toit attributes the lack of asset manager interest in the local property sector to the disastrous under-performance of property in the late 1990s – it has since become the forgotten asset class.
Currently, listed property accounts for almost four percent of the total capitalisation (value of all issued shares) of the JSE. It is expected that, with the launch of a real estate investment trust (Reit) sector on the exchange, more property companies will list on the JSE and more foreign investment will flow into the local market (see “Common structure gives investors confidence in Reits”, below).
Du Toit says a conservative assumption is that an investment in listed property will provide a return of between eight and 12 percent a year in the immediate future, while a direct investment in commercial property should provide a return of between 10 and 14 percent a year.
“Nothing is better than this if you are a long-term investor.
“No pension fund, no guaranteed annuity will give you this type of return. Listed property is an ideal investment for a pensioner,” he says.
While you are saving for retirement, you are permitted to invest a maximum of 25 percent of your savings in listed property in terms of the prudential investment requirements of the Pension Funds Act. This restriction does not apply to investment-linked living annuities, where pensioners choose how to invest their retirement savings to generate an income.
Du Toit says that a significant advantage of listed property when you save for a pension or invest your retirement savings for an income is that you do not pay income tax on the rental distributions or the capital gains.
Du Toit says the 30-year global bull market in bonds, which has played a major role in the relatively high income provided by guaranteed annuities, has ended, because we have entered a prolonged period of low interest rates. Bond yields are dictated by prevailing and expected interest rates.
“Interest rates will remain in single digits. Property will provide better and more stable returns than bonds in most years,” he says.
One of the main advantages of listed property is that it provides a steady income stream of about 7.5 percent a year based on current share prices, Du Toit says.
He says that a steadily improving income stream means that people, such as pensioners, who are on a fixed income do not have to worry about the underlying share price.
He doubts that the listed property sector’s average return of 20 percent a year over the past decade will be repeated soon, but he strongly believes that listed property will continue to provide sound returns.
Du Toit says that listed property has a track record of:
* Being remarkably resilient under all market conditions. There has never been a year in which South African listed property has had negative distribution growth.
* Providing stable and growing distributions (rental), as well as capital growth.
* Performing well when interest rates are stable and when inflation and interest rates are falling. The biggest risk to property investments is sharply rising interest rates, because this undermines the affordability of borrowing to buy property.
* Liquidity (it is easy to sell your investment). You can buy and sell shares in property companies and/or invest in collective investments (unit trust funds and exchange traded funds) that invest in property. If you invest directly in property, your investment is often very illiquid.
Du Toit says it is expected that the listed property sector will receive further impetus from:
* More property companies listing on the JSE.
* The introduction of Reits on the JSE. Reits are likely to attract money from two sources:
– Occupational retirement funds and retirement annuity funds. Du Toit says that listed property is a return-enhancer and plays an important part in diversifying risk in a balanced investment portfolio.
– Offshore. South Africa, which is the world’s eighth-largest Reit market, has been added to global Reit indices. Many institutional investors are index investors, so more money is expected to flow into the local market from offshore.
COMMON STRUCTURE GIVES INVESTORS CONFIDENCE IN REITs
On May 1 this year, South Africa’s listed property sector was brought into line with international standards for listed property when the JSE launched a real estate investment trust (Reit) sector.
Reits are listed companies that own rental-producing property and distribute rental income, in the form of taxable interest, to the holders of shares or units.
Estienne de Klerk, president of the South African Property Owners’ Association and executive director of Growthpoint, says that Reits will eventually replace listed property unit trusts (PUTs) and property loan stock (PLS) companies, simplify taxation and enhance fund governance. Growthpoint is the largest listed property company in South Africa.
Reits are listed on some 25 international stock exchanges. They have similar rules and structures, giving investors confidence when they invest in property in a foreign market.
Reits are structured so that no income tax is payable on rental income in the hands of the listed company and no capital gains tax is paid on a gain from the sale of property owned by the company.
Distributions, in the form of interest, are taxed in the hands of shareholders from the first cent – there are no tax exemptions on interest or rental earnings (except for retirement fund investors). This is in line with government’s move away from tax exemptions on interest, which it proposes to replace with tax-incentivised savings accounts for individuals.
In South Africa, Reits invest predominantly in retail, office, industrial, hotel and hospital properties; their exposure to residential property is limited.
Tower Property Fund, launched by Spire Property Group, this week became the first property fund to list on the JSE under the Reit structure, joining 16 companies that listed as either PUTs or PLS companies and have now converted to Reits.
The market capitalisation (value of all issued shares) of the JSE property sector grew from R61 billion at the end of June 2003 to R328 billion at the end of June 2013.
There are 45 property companies on the JSE, accounting for 3.8 percent of the stock exchange’s total capitalisation.