Forget market turbulence and stick to your plan!
We must admit to feeling a trifle disillusioned when we look at our equity portfolio. It seems that our shares, no matter how carefully chosen, are trading at fractions of the price they were when we bought them. It’s this emotion that causes us to make unnecessary investments mistakes. You have to avoid the temptation to sell all your ailing investments and start with a fresh slate. Instead you should batten down the hatches, trust in the research that guided your investment decision at the outset, and ride out the storm.
In today’s newsletter we carry an article written by the Association of Property Unit Trusts. They’ve got some great ideas on riding out the current market volatility. Whether markets are up or down, they believe that “the wise investor will stick with his or her long-term savings plan, which will include property!” The rest of the article follows:
Economies around the world are stretched
It’s no secret that economies around the world are facing some tough times, and the prices of many assets, from stocks to individual homes, have fallen. However, that doesn’t mean that people should change their savings strategies.
Savers, including the more experienced and those young ones who have time to recover financially from the current economic downturn, should stick to their long-term savings plans, and make sure that they keep building up a balanced portfolio of stocks, bonds, cash and property. It’s even possible that those who invest now could pick up some great bargains; many high-quality assets are looking very cheap these days.
According to Simon Pearse, CEO of financial services firm Marriott, “For those planning to buy property, the very best time to borrow money for the purchase is when interest rates are at their highest point in the cycle. First, this will represent the highest level of monthly payments required to service the debt, meaning that you know that you can afford the debt. And second, the property purchased will be at or near its lowest price. Things can only improve when interest rates begin to decline, as the cost of the debt should decrease while the value of the property should increase.”
You cannot predict the top of the interest rate cycle
“Right now, South Africa is at the high point of an interest-rate tightening cycle that started in June 2006; since that month, the prime rate has gone from 10.5% to 15.5%. Although no one can predict exactly when interest rates will come down, it’s likely that we are at or near the top of the interest rate cycle. Inflation has started to ease, and once it starts ’trending’ back toward its target range of three to six percent, rates should come down. In the meantime, property prices have been falling, so it’s likely that when rates do decrease, prices will rise”, says Craig Hallowes, spokesperson for the Association of Property Unit Trusts (APUT).
Putting the property asset class on your radar screen is always a sensible idea. For those who are interested in looking into investment property, Hallowes says a balanced portfolio has traditionally included all the main asset classes, namely equities (or shares), bonds (debt instruments issued by government or corporations with good investment grades), cash and property (both in the form of listed property and direct property).
“Their correlations to one another are low which provides an investor with good diversification in her portfolio. There are many access points to property and investors would be wise to consider the many different options available to them before making an investment in property.
Seven property investments – and their strengths and weaknesses
1. Direct property ownership (buy-to-let) offers full control over the investment but suffers from a lack of liquidity. You also have to actively manage the investment. At present rental yields are low and entry costs prohibitive.
2. Joint venture or partnership involves buying a property investment with a number of other parties. You can gain access to higher value properties that would be impossible on you own. The setbacks of this type of investment include lack of liquidity, potential disagreements with partners and low income yields.
3. Property syndication is an unlisted investment scheme that enables groups of investors to buy into larger property ventures. You pay a low individual entry costs; but be aware of the risks. A number of property syndications have been in the press for all the wrong reasons in the past. Be on the lookout for high management costs and be aware that it can be difficult to exit the investment. Some schemes have been known to manipulate property values.
4. Listed property includes Property Unit Trusts (PUTS) and Property Loan Stocks (PLS) which are listed on the JSE. There are a range of benefits to this class of property investment, including high liquidity, professional managers, transparent costs, considerable diversification of assets and the protection offered by a regulated market. You can also sell the units at any time, with guaranteed market liquidity. There is a limited downside in that you cannot select the properties that you like!
5. Exchange Trade Funds (ETFs) are similar to collective investment schemes in that they’re made up of a basket of ‘shares’ to simulate a particular index – in this case the Listed Property Index. These offer an easy access to property stocks with low and transparent entry costs. ETFs are highly liquid and benefit from market regulation. Of course, if you like to actively manage your portfolio this type of investment may not suit you.
6. Collective investments are unitised funds set up under a trust deed. It allows individual investors to participate in a large pool of assets, in this case property assets. Collective investments are highly liquid, managed by professionals, offer explicit costs, offer great diversification and operate in a highly regulated market. Be on the lookout for management fees when you invest.
7. Offshore property investments can be made through any of the methods mentioned above. It’s wise to always consult an expert on the foreign market you hope to invest in – as you could end up investing in low-quality properties. You need to do your homework before going offshore. And never forget about the exchange rate risk.
Click here to see the table provided by the Association of Property Unit Trusts.
There you have it – a range of property investments to suit every investment style. We like the listed property, exchange traded funds and collective investment options; but we’ve always been fans of equity type investment activities. What’s your favourite?
Editor’s thoughts:
One thing South African investors can be thankful for is the range of products at their disposal. Although we still battle with some foreign exchange regulations, we are free to invest anywhere in the world. And that opens up a range of property investment opportunities? Have you invested in property syndication? If you have we’d love to hear about your experiences. Send your comments to [email protected] or add them below.
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