Look­ing a lit­tle ex­pen­sive

But REITS seem right route for re­turns

Finweek English Edition - - MONEY CLINIC - SHAUN HAR­RIS shaunhar­ris@ya­hoo.com

LISTED PROP­ERTY in South Africa – and the ad­mit­tedly du­bi­ous res­i­den­tial mar­ket in the United States – is top of the pops right now. Does that mean in­vestors should con­sider buy­ing prop­erty shares? Prob­a­bly not, un­less they ex­am­ine the real es­tate in­vest­ment trusts (REITs) very closely. The diver­si­fi­ca­tion of a listed prop­erty unit trust fund would prob­a­bly be a bet­ter op­tion.

Franklin Tem­ple­ton Real As­set Ad­vi­sors tell us REITs in the US have out­per­formed its stock mar­kets, with the res­i­den­tial sec­tor en­joy­ing the largest sec­tor re­turn for the year to end-May. Wary in­vestors will re­mem­ber it was se­cu­ri­ti­sa­tion of re­tail prop­erty shares in the US that started the global fi­nan­cial melt­down. But that was then and it’s time to look be­yond, with Franklin Tem­ple­ton say­ing a num­ber of fac­tors are driv­ing REIT re­turns, in­clud­ing the huge quan­ti­ta­tive eas­ing (QE2) pro­gramme, up­beat fourth quar­ter earn­ings in 2010 and a gen­er­ally pos­i­tive out­look from a num­ber of econ­o­mists.

Back home the gen­eral real es­tate sec­tor leads the ta­bles with a re­turn of 4,3% for the quar­ter to end-June. Real es­tate unit trusts with in­come rein­vested gained 4,4% over that quar­ter. “Global equity mar­kets only man­aged to eke out a pal­try gain of 0,7% in terms of US dol­lars in the June quar­ter. The FTSE/JSE All Share In­dex re­turned 0,6% with in­come rein­vested and a neg­a­tive 0,7% in US dol­lars,” says Ryk de Klerk, co-founder and ex­ec­u­tive di­rec­tor at PlexCrown Fund Rat­ings.

Franklin Tem­ple­ton be­lieves in­vestors are ready to again buy REIT stocks. “That’s on the con­vic­tion prof­its for com­mer­cial land­lords would po­ten­tially rise as va­can­cies in of­fice build­ings, flats and shop­ping malls de­clined. Some in­vestors are also at­tracted by the higher div­i­dends REITs pay out, as US Trea­sury yields re­main low,” says Jack Fos­ter, head of re­tail sales at Franklin Tem­ple­ton Real As­set Ad­vi­sors.

Listed prop­erty has been a con­sis­tent per­former in the South African mar­ket. In­vestors like the shares be­cause they’re a means of di­ver­si­fy­ing away from reg­u­lar equity hold­ings. De Klerk says SA’s real es­tate unit trust sec­tor’s su­pe­rior re­turns weren’t lim­ited to the past quar­ter. “The sec­tor is also the leader over three and five years, with re­turns of 22,1% and 15,9%/ year re­spec­tively. Lo­cal in­vestors in do­mes­tic bond unit trusts ben­e­fited from the con­cerns re­gard­ing the global eco­nomic out­look and a lower oil price as in­vestors sought refuge in less risky as­sets.” The quar­terly re­turns of do­mes­tic bond funds av­er­aged 3,9%, with in­come rein­vested, mak­ing it the sec­ond best per­form­ing sec­tor over the quar­ter.

De Klerk’s point about in­vestors seek­ing less risky as­sets is no doubt one fac­tor driv­ing listed prop­erty and will prob­a­bly re­main so, as many in­vestors are still ner­vous of full equity funds.

De Klerk warns in­vestors not to base their in­vest­ment de­ci­sions on short-term mar­ket trends. “While the quar­ter’s re­sults could en­cour­age many in­vestors to buy prop­erty unit trusts, af­ter the strong run in the prices of listed prop­erty, this as­set class isn’t cheap at cur­rent lev­els. Fur­ther­more, though many in­vestors per­ceive prop­erty to be less risky than eq­ui­ties, few re­alise the cor­re­la­tion be­tween listed prop­erty and the mar­ket as a whole has risen sig­nif­i­cantly over the past few years.”

So should in­vestors in­stead be look­ing at off­shore listed prop­erty? Per­haps so, but it’s a large and com­plex mar­ket. Di­ver­si­fy­ing into a prop­erty unit trust fund over­seas might be the best route. Listed prop­erty has been a good in­vest­ment in the past. How­ever, in­vestors per­haps now need to be more cir­cum­spect.

RYK DE KLERK

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