So you want to get into property?
FOR ALL THE JARGON that accompanies investment products, the simple reason the majority of people buy investments is to enjoy alternative sources of income. For that reason, investment in fixed property, property syndications and property unit trusts has proven exceptionally popular over the past 10 to 15 years. Investors have enjoyed an asset that’s kept pace with inflation and in the case of property unit trusts has delivered consistent and predictable distribution yields.
That’s reflected in the SA Listed Property Index recently touching an all-time high and, according to Stanlib, offering a forward dividend yield of 8,3% – which is pretty tough to argue with. This rise in the index has been attributed to foreign asset managers seeking higher yields they can’t get in their home markets.
South Africa’s real estate unit trust sector’s superior returns weren’t limited to the past quarter, says Ryk de Klerk, who puts together the Plexcrown fund ratings. He told investors at a recent update: “The sector is also the leader over three and five years, with returns of 22,1% and 15,9%/year respectively.”
With banks becoming stricter about what they’re lending, the access points for many retail investors have become significantly narrower, meaning many are left with the option of buying listed property, a property unit trust or one of the PROPTRAX-listed exchange-traded funds (ETFs).
If that’s your starting point, the obvious question is which do I choose? First instincts are to go with the passive ETFs, simply because it’s cheaper and – let’s be honest – a 25%/year return over the past three years is hard to argue with.
However, a closer look at the managed portfolios over the same period might make you think twice. For example:
Tracker Fund delivered 85%. was hot on its heels at 84%.
Investors should bear in mind the Stanlib fund is also delivering that return on the back of a total expense ratio of 1,5%, against the 0,86% cost base the PROPTRAX ETF is charging. The “kicker” for the Stanlib product has been its ability to grow the income line of its offering over the three-year period. That alone has contributed around 30% of the growth over the past three years.
Stanlib property guru Keillen Ndlovu says dividends from listed property are expected to rise around 6% this year, which will just about keep parity with inflation. That’s an important measure to keep your eye on, because if you’re investing for income remember you need an investment that’s growing faster than the value of your money is being eroded.
However, Ndlovu did warn that with toll roads, property taxes and rising electricity prices starting to bite, these expenses could eat into the ability of landlords to fill their properties and push through rental increases. various sectors, Ndlovu noted retail was “showing stronger fundamentals than the office and industrial sectors” – pointing out while shopping centres were seeing better foot traffic, there continued to be an oversupply of office space.
It isn’t often our recommendation is to go actively managed product over passive but the current property sector may just be an exception to the rule.