Listed prop­erty will give your sav­ings and pen­sion a boost

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

Listed prop­erty has come of age, pro­duc­ing solid re­turns and di­ver­si­fy­ing risk. It should be in the in­vest­ment port­fo­lio of ev­ery re­tire­ment fund and, in par­tic­u­lar, in the in­vest­ment port­fo­lio of ev­ery pen­sioner.

Prop­erty is the “war­rior as­set class”, Dries du Toit, a fi­nan­cial con­sul­tant and for­mer chief in­vest­ment of­fi­cer of San­lam In­vest­ment Man­age­ment, said at the IPD an­nual prop­erty in­vest­ment con­fer­ence held in Cape Town this month.

Du Toit says that 90 per­cent of as­set man­agers have missed out on aver­age re­turns of 20 per­cent and more a year over the past decade, sim­ply be­cause they ig­nored prop­erty.

The Alexan­der Forbes Large Re­tire­ment Fund Man­ager Watch for June 2013 shows that only three per­cent of re­tire­ment fund as­sets are in­vested in prop­erty.

The listed prop­erty sec­tor not only per­formed well in the con­text of South Africa, but it also beat prop­erty prices in all de­vel­oped coun­tries.

Du Toit at­tributes the lack of as­set man­ager in­ter­est in the It’s un­likely that listed prop­erty will soon re­peat its decade-long run of an­nual re­turns of 20 per­cent, but you can­not af­ford to ig­nore this as­set class while you are sav­ing for re­tire­ment and if you need a se­cure and grow­ing in­come in re­tire­ment. Bruce Cameron re­ports lo­cal prop­erty sec­tor to the dis­as­trous un­der-per­for­mance of prop­erty in the late 1990s – it has since be­come the for­got­ten as­set class.

Cur­rently, listed prop­erty ac­counts for al­most four per­cent of the to­tal cap­i­tal­i­sa­tion (value of all is­sued shares) of the JSE. It is ex­pected that, with the launch of a real es­tate in­vest­ment trust (Reit) sec­tor on the ex­change, more prop­erty com­pa­nies will list on the JSE and more for­eign in­vest­ment will flow into the lo­cal mar­ket (see “Com­mon struc­ture gives in­vestors con­fi­dence in Reits”, above right).

Du Toit says a con­ser­va­tive as­sump­tion is that an in­vest­ment in listed prop­erty will pro­vide a re­turn of be­tween eight and 12 per­cent a year in the im­me­di­ate fu­ture, while a di­rect in­vest­ment in com­mer­cial prop­erty should pro­vide a re­turn of be­tween 10 and 14 per­cent a year.

“Noth­ing is bet­ter than this if you are a long-term in­vestor.

“No pen­sion fund, no guar­an­teed an­nu­ity will give you this type of re­turn. Listed prop­erty is an ideal in­vest­ment for a pen­sioner,” he says.

While you are sav­ing for re­tire­ment, you are per­mit­ted to in­vest a max­i­mum of 25 per­cent of your sav­ings in listed prop­erty in terms of the pru­den­tial in­vest­ment re­quire­ments of the Pen­sion Funds Act. This re­stric­tion does not ap­ply to in­vest­mentlinked liv­ing an­nu­ities, where pen­sion­ers choose how to in­vest their re­tire­ment sav­ings to gen­er­ate an in­come.

Du Toit says that a sig­nif­i­cant ad­van­tage of listed prop­erty when you save for a pen­sion or in­vest your re­tire­ment sav­ings for an in­come is that you do not pay in­come tax on the rental dis­tri­bu­tions or the cap­i­tal gains.

Du Toit says the 30-year global bull mar­ket in bonds, which has played a ma­jor role in the rel­a­tively high in­come pro­vided by guar­an­teed an­nu­ities, has ended, be­cause we have en­tered a pro­longed pe­riod of low in­ter­est rates. Bond yields are dic­tated by pre­vail­ing and ex­pected in­ter­est rates.

“In­ter­est rates will re­main in sin­gle dig­its. Prop­erty will pro­vide bet­ter and more sta­ble re­turns than bonds in most years,” he says.

One of the main ad­van­tages of listed prop­erty is that it pro­vides a steady in­come stream of about 7.5 per­cent a year based on cur­rent share prices, Du Toit says.

He says that a steadily im­prov­ing in­come stream means that peo­ple, such as pen­sion­ers, who are on a fixed in­come do not have to worry about the un­der­ly­ing share price.

He doubts that the listed prop­erty sec­tor’s aver­age re­turn of 20 per­cent a year over the past decade will be re­peated soon, but he strongly be­lieves that listed prop­erty will con­tinue to pro­vide sound re­turns.

Du Toit says that listed prop­erty has a track record of:

Be­ing re­mark­ably re­silient un­der all mar­ket con­di­tions. There has never been a year in which South African listed prop­erty has had neg­a­tive dis­tri­bu­tion growth.

Pro­vid­ing sta­ble and grow­ing dis­tri­bu­tions (rental), as well as cap­i­tal growth.

Per­form­ing well when in­ter­est rates are sta­ble and when in­fla­tion and in­ter­est rates are fall­ing. The big­gest risk to prop­erty in­vest­ments is sharply ris­ing in­ter­est rates, be­cause this un­der­mines the af­ford­abil­ity of bor­row­ing to buy prop­erty.

Liq­uid­ity (it is easy to sell your in­vest­ment). You can buy and sell shares in prop­erty com­pa­nies and/or in­vest in col­lec­tive in­vest­ments (unit trust funds and ex­change traded funds) that in­vest in prop­erty. If you in­vest di­rectly in prop­erty, your in­vest­ment is of­ten very illiq­uid.

Du Toit says it is ex­pected that the listed prop­erty sec­tor will re­ceive fur­ther im­pe­tus from:

More prop­erty com­pa­nies list­ing on the JSE.

The in­tro­duc­tion of Reits on the JSE. Reits are likely to at­tract money from two sources:

Oc­cu­pa­tional re­tire­ment funds and re­tire­ment an­nu­ity funds. Du Toit says that listed prop­erty is a re­turn-en­hancer and plays an im­por­tant part in di­ver­si­fy­ing risk in a bal­anced in­vest­ment port­fo­lio.

Off­shore. South Africa, which is the world’s eighth­largest Reit mar­ket, has been added to global Reit in­dices. Many in­sti­tu­tional in­vestors are in­dex in­vestors, so more money is ex­pected to flow into the lo­cal mar­ket from off­shore.

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