Investors pile back in
Property-focused unit trust funds in favour again
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.