Looking a little expensive
But REITS seem right route for returns
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