When phys­i­cal prop­erty is not an op­tion

Phys­i­cal prop­erty is be­yond the reach of many due to the sheer cost in­volved. And even those who can af­ford it may be re­luc­tant to take the plunge. An al­ter­na­tive is prop­erty shares – Schalk Louw com­pares this op­tion to phys­i­cal prop­erty.

Finweek English Edition - - MARKETPLACE INVESTMENT - • EASY TO TRADE: • LOWER COSTS: • LESS MAIN­TE­NANCE: • REG­U­LAR FEED­BACK: ed­i­to­rial@fin­week.co.za Schalk Louw is a port­fo­lio man­ager at PSG Wealth.

in many ways, our lives have be­come ex­tremely com­pli­cated. No dif­fer­ent to tech­nol­ogy, in­vest­ments have be­come more and more ad­vanced. Un­for­tu­nately, they haven’t nec­es­sar­ily be­come eas­ier to un­der­stand. That said, the term “good op­por­tu­nity” doesn’t only have to ap­ply to com­pli­cated in­vest­ment op­tions. Sim­pler and even cheaper in­vest­ments such as prop­erty shares def­i­nitely shouldn’t be over­looked as an in­vest­ment op­tion.

Hav­ing de­liv­ered re­turns of 14% per year over the past five years, it has been South Africa’s best­per­form­ing as­set class (out of lo­cal shares, bonds, prop­erty shares and cash). I’m not say­ing that prop­erty shares will con­tinue to achieve the same amount of growth over the next five years, though.

In fact, as at the end of June, it has been the worstper­form­ing as­set class for 2017 so far. The thing that has al­ways at­tracted in­vestors to this as­set class, how­ever, is the in­come that prop­erty shares of­fer, es­pe­cially for those who need an ad­di­tional in­come from their in­vest­ments.

So, what ex­actly are prop­erty shares and what are the ad­van­tages of in­vest­ing in them? It is a port­fo­lio con­sist­ing of a num­ber of prop­er­ties (listed and un­listed). The ad­van­tages of in­vest­ing in these shares in­clude the fol­low­ing:

Un­like phys­i­cal prop­er­ties, most of the prop­erty shares listed on the FTSE/JSE are highly trad­able. As an in­vestor, you should be able to buy and sell your shares within a day or two. You don’t need to wait for the prop­erty to be trans­ferred or reg­is­tered as you would with phys­i­cal prop­erty. Your money will re­flect in your bank ac­count within days.

There are no costs to pay in terms of agent com­mis­sions, reg­is­tra­tion and lawyers, as is the case with phys­i­cal prop­er­ties. You will need to pay bro­ker fees, mar­ket taxes and VAT, but these costs are con­sid­er­ably lower than the other costs men­tioned.

You don’t have to wait for your monthly ren­tal in­come as you would in the case of phys­i­cal prop­erty. You also don’t have to worry about any form of main­te­nance to the prop­erty.

For com­pa­nies to be listed on the FTSE/JSE, they must ad­here to a very strict set of rules and reg­u­la­tions. Some of these reg­u­la­tions stip­u­late that com­pa­nies must make their au­dited fi­nan­cial re­sults avail­able to share­hold­ers, sav­ing you the trou­ble of hav­ing to au­dit your own prop­erty in­vest­ment as would be the case in phys­i­cal prop­erty.

Un­like phys­i­cal prop­er­ties, most of the prop­erty shares listed on the FTSE/ JSE are highly trad­able.

With the rand still per­form­ing stronger rel­a­tive to last year and with in­fla­tion on the de­cline and our econ­omy still un­der se­vere pres­sure, the pos­si­bil­ity that the Re­serve Bank may lower in­ter­est rates in the near fu­ture is huge – some­thing that will def­i­nitely af­fect the value of prop­erty shares. No dif­fer­ent to phys­i­cal prop­erty, prop­erty shares too are very sen­si­tive to in­ter­est rate move­ments, be­cause this af­fects the amount of in­ter­est that in­vestors earn on their cap­i­tal in­vested in the money mar­ket.

As money-mar­ket rates be­come more unattrac­tive, in­vestors will usu­ally start to look for a higher in­come and many of them will be will­ing to take the some­what higher risk at­tached to prop­er­ties. As prop­erty shares are bought, prices tend to rise while earn­ings tend to fall.

Con­sid­er­ing the sec­tor’s an av­er­age his­tor­i­cal div­i­dend yield of 6.2%, in­vestors aren’t re­ally earn­ing that much less than they would in money-mar­ket in­vest­ments (pro­vided prop­erty shares man­age to main­tain these pay­outs). Al­though prop­erty may carry more risk when com­pared to money-mar­ket in­vest­ments, it does of­fer the ad­van­tage of pos­si­ble cap­i­tal growth over the long term. Just re­mem­ber that even though the in­come at­tached to prop­erty shares is listed in the div­i­dend in­come sec­tion in news­pa­pers, mag­a­zines and web­pages, it is ac­tu­ally an in­ter­est in­come, and in­vestors will be taxed on this in­come.

The fore­cast div­i­dend yield rel­a­tive to money-mar­ket rates and the price/net as­set value in­di­cate that Growth­point, Re­de­fine and Fortress B cur­rently stand out as good buys. All in­di­ca­tions are that the in­ter­est rate en­vi­ron­ment will def­i­nitely swing in favour of these shares in the months to come. ■

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