In­vestors pile back in

Prop­erty-fo­cused unit trust funds in favour again

Finweek English Edition - - Portfolio Punts -

AF­TER BAIL­ING OUT OF real es­tate­fo­cused col­lec­tive in­vest­ment funds in first half 2008, in­vestors made an about-turn in third quar­ter 2008, the lat­est fig­ures from the As­so­ci­a­tion of Col­lec­tive In­vest­ments (ACI) show. The ACI says the in­dus­try’s 23 real es­tate funds saw a net in­flow of R737m in third quar­ter 2008, bring­ing to­tal as­sets for this sec­tor to R17,48bn. Those funds are all in­vested in JSE-listed prop­erty stocks mainly ex­posed to SA’s com­mer­cial prop­erty mar­ket.

Prop­erty in­vest­ments now rep­re­sent 2,7% of the col­lec­tive in­vest­ment in­dus­try’s to­tal as­sets of R647bn. The pos­i­tive flow of funds into real es­tate funds in the third quar­ter fol­lows a net out­flow of R1,049bn and R142m re­spec­tively in the sec­ond and first quar­ters of this year.

Keillen Ndlovu, co-head of Stan­lib’s prop­erty fran­chise, says the rush back into prop­erty from July was prompted mainly by SA’s im­proved inflation out­look and a be­lief that the in­ter­est rate cy­cle has peaked. Ndlovu says it also ap­pears global mar­ket volatil­ity is caus­ing in­vestors to chase ve­hi­cles with good earn­ings vis­i­bil­ity. In that re­gard listed prop­erty has an ad­van­tage over gen­eral eq­ui­ties, as the rental in­come earned by prop­erty funds is more sta­ble and pre­dictable than the earn­ings of gen­eral eq­uity com­pa­nies.

Says Ndlovu: “In gen­eral eq­ui­ties, if busi­ness slows down, earn­ings im­me­di­ately suf­fer. Whereas the earn­ings of prop­erty com­pa­nies are de­fen­sive, backed by rental leases signed for three to four years on av­er­age. In ad­di­tion, rental leases es­ca­late at 8% to 10%/year, cre­at­ing a good inflation hedge.”

Ndlovu says it’s in­ter­est­ing there’s been vir­tu­ally no cor­re­la­tion be­tween eq­ui­ties and listed prop­erty over the past year, cre­at­ing a com­pelling case for hav­ing listed prop­erty in a bal­anced port­fo­lio. The lat­ter is one rea­son why Ndlovu be­lieves the real es­tate sec­tor is start­ing to see in­creased in­ter­est from pen­sion fund man­agers that pre­vi­ously had lit­tle or no ex­po­sure to listed prop­erty.

Listed prop­erty also looks at­trac­tive com­pared to other in­come pay­ing in­vest­ments, such as bonds and cash. The sec­tor is cur­rently trad­ing at a for­ward yield of just un­der 11%, a level last seen in early 2005. Ndlovu says that’s not too far off the 12% lev­els in­vestors can earn on cash and higher than bond yields of 9,4%.

An­other key at­trac­tion is the in­come or dis­tri­bu­tions that prop­erty funds pay out to in­vestors, grow on the back of the an­nual rental es­ca­la­tions paid by ten­ants in shop­ping cen­tres, of­fice blocks and fac­to­ries. By con­trast, the in­come earned on cash and bonds don’t grow. Growth in in­come pay­outs by listed prop­erty funds is up an av­er­age 12% so far this year. The in­dus­try ex­pects in­come growth to re­main in the 10% to 12%/ year band for the next two years.

Lat­est ACI fig­ures show that over a one-year pe­riod real es­tate fo­cused funds out­per­formed gen­eral eq­uity funds, with the prop­erty sec­tor de­liv­er­ing an av­er­age to­tal re­turn of -10,29% for the 12 months to end-Septem­ber 2008. That com­pares to a to­tal re­turn of -16,87% for gen­eral eq­uity funds. Those fig­ures are based on lump sum in­vest­ments.

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