Liberty clients who have policies invested in its unlisted property portfolio are being offered an opportunity to switch their investment, either wholly or partially, into a new portfolio which will hold shares in a listed property trust exposed to the same blue-
chip properties.

When Liberty’s Two Degrees real estate investment trust (Reit) lists on the JSE in early December, the properties in the portfolio will move to a market valuation, and Liberty expects policyholders who switch to the new Reit portfolio, as well as those who do not switch, to enjoy a three- to five-percent increase in the valuation of their portfolio.

Liberty’s Two Degrees Reit will initially hold portions of the properties in Liberty’s unlisted R27 billion property portfolio. These blue-chip properties include Sandton City Shopping Centre, Eastgate Centre, Melrose Arch, Nelson Mandela Square and Liberty Midlands Mall, the Botshabelo Mall development and Liberty’s head offices in Century City and Umhlanga, among others. The Reit will also invest in developments in South Africa and the rest of Africa.

Despite these being very successful properties, the Liberty Property Portfolio returns have lagged those generated by the FTSE/JSE Listed Property Index (see table). The index returned an average of 18.78 percent a year over the past 10 years to the end of June, according to Profile Data and 14.32 percent a year over the past three years.

However, comparing unlisted property investments with listed ones is misleading, because listed investments are valued in line with investor demand and sentiment and the liquidity of the investment.

Reits are entities that invest directly in property and enjoy a unique tax dispensation. These structures are recognised in a number of different countries and are available on their stock exchanges.

The Two Degrees Reit will take up an increasing share of the returns of the existing properties as policyholders invested in the unlisted Liberty Property Portfolio exit that portfolio. Liberty is allowing policyholders with exposure to the property portfolio to switch up to R3 billion in total into its life portfolio, the Real Estate Portfolio, which will, in turn, invest in the Reit.

Policyholders making the switch will enjoy a five-percent discount on the listing price, which has yet to be determined. There will be no costs for the switch and the portfolio costs will be the same.

David Lloyd, the managing director of Liberty Innovate, says the advantage of the switch is that normally a Reit takes a long time to build up a portfolio of good properties, but by buying into Liberty’s existing property portfolio, the Reit gets the immediate benefit of an already-established blue-chip portfolio.

Over and above any switches, Liberty clients, regardless of whether they are currently exposed to the Liberty Property Portfolio or not, are being offered an opportunity to invest up to R1 billion in the Reit on a first-come-first-served basis ahead of the listing, also at a five-percent discount to the listing price.

Liberty is expecting the Reit will buy up to R6 billion of the R27 billion in the Liberty Property Portfolio and it is expecting to raise R10 billion in the Reit at the listing, providing it with R4 billion to invest in other properties. The proportion of the existing blue-chip portfolio to new properties will depend on how many policyholders exit the unlisted portfolio and how much new investment the Reit receives.

The investment transferred from the property portfolio to the Reit will constitute a portion of the whole property portfolio, ensuring that existing policyholders are not prejudiced and will maint ain their exposure to the full property portfolio.

Policyholders who remain in the original property portfolio will also enjoy a once-off revaluing of their investments, because the Reit will buy the properties from the original portfolio at market value.

If your Liberty policy is exposed to the property portfolio and it includes a guarantee on the capital or the returns, and you decide to switch, you will lose the guarantee. If you had valid reasons for taking out the guarantee in the first place, it may not be worth your while switching to the Reit, which is exposed to the ups and downs of the market.

Also be careful if you have a retirement annuity (RA) that must comply with regulation 28 of the Pension Funds Act. The switch and the increase in the value of the Reit could affect your asset allocation.

If you have an RA that you took out before 2011, you may be entitled to higher equity and listed property exposure than a newer RA, because these policies were allowed, individually, to exceed the regulation 28 limits, as long as the RAs as a group complied with the regulation. However, a switch will trigger the need for your RA to comply individually.

Ian Anderson, chief investment officer at Grindrod Asset Management, says there’s no doubting the quality of the property portfolio, but the problem for policyholders is that they do not know what price they will pay for their investment in the Reit, even though it will be at a discount to the price other shareholders will pay.

The price at listing will be based on demand from the market for the initial public offering of the shares in the Reit.

Despite this, Anderson says policyholders should consider participating in the new Reit.

Another real estate fund manager, who did not want to be named, said Liberty’s property portfolio has some unique assets that do not often come onto the market, but investors still need to weigh up the value relative to the price at listing. He said asset managers were waiting for more information about the yields and capital appreciation of the pro-
perties in the portfolio.

Liberty’s Two Degrees Reit will be managed by the same team within Stanlib, under chief executive officer of Liberty Two Degrees, Amelia Beattie, who has managed the Liberty Property Portfolio for many years.