Illustration: Colin Daniel

Rands and Sense
Martin Hammond

In South Africa, several types of savings vehicles exist to provide individual investors with access to financial markets, subject to those savings wrappers’ specific restrictions. In this article we examine the benefit of including listed property in a tax-free savings account (TFSA) over other asset classes given the current market environment.

Listed property, or real estate investment trusts (Reits) typically, and especially in the last decade in South Africa, trades at quite attractive dividend yields compared to ordinary listed shares.

The reason for this is that a Reit is generally exempt from tax on its earnings, as long as the earnings are paid out as dividends. The listed property dividends received by an individual will then be taxed at the full marginal tax rate of that individual. Given a specified amount of pre-tax income generated in a Reit and ordinary company, the post-tax amount received by an investor is (almost) the same. This is illustrated in Table A

A TFSA allows an investor to earn the full property dividend and not pay any tax. If an investor holds either listed property or listed ordinary shares in a TFSA, the amount of tax saved is shown in Table B. These are significant savings for an investor to hold property shares in a TFSA compared to ordinary shares.

Looking through the recent price volatility in some of the listed property shares, we find that most companies published financial results that were broadly in line with market expectations. The de-rating in the property index seems to be because of speculative fears stemming from the Resilient stable of companies and not from a deterioration in general property company fundamentals.

Additionally, most property counters show positive dividend per share growth over the past year. This robust growth in dividends, coupled with the de-rating of the property index, has led to good yields available in property shares.

The average forward yield spread on property relative to bonds has historically averaged around 2.00% and at its peak was wider than 4.00%. This spread has narrowed to approximately 0.45% as of the end of March 2018. This means that by investing in property shares at the current valuations, one can attain yields similar to the All Bond Index (Albi) but with the potential for higher capital appreciation associated with property.

Relative to equities, the yield spread has widened to approximately 5.00% as of the end of March 2018, compared to the historic average spread of around 3.35%. The yield on property, relative to bonds and equities, is currently as attractive as it has ever been within the recent five-year period.

Generally, an investor would aim to diversify their holdings across asset classes and thus minimise any specific risks to the portfolio. If an investor believes that a 10% allocation to property in his voluntary savings portfolio is appropriate, accessing property via a TFSA allows him to make voluntary savings of R330 000 per annum before the benefit explained above is depleted (by contributing R33 000 to the TFSA). That should cater for a sizable portion of the voluntary savers.

Second, an investor who has for the past few years contributed to a TFSA may consider switching their holding into a property unit trust within the TFSA to take advantage of its tax benefits, while holding equity or income assets elsewhere.

Property shares offer good value relative to their history and to bonds. Holding property shares in a TFSA allows for the maximum benefit from potential distributions and allows for sufficient annual contributions to form a good part of voluntary savings balanced portfolio.


Martin Hammond is a market analyst at Prescient Investment Management