How to invest your bonus
Got a bonus? Think of PUTs
In these tough economic times, those of us lucky enough to receive a bonus or 13th cheque should think carefully about how to make those extra funds work extra hard. When bonus time comes around, there are many articles and commentators giving recommendations about what to do with the extra cash.
Based on the premise that debt reduction is one of most prudent actions, one of the more common (and sensible) pieces of advice is to put at least some of the money into your home loan. With interest rates having risen rapidly over the past few years, any move to lower debt is encouraged.
But what if you do not own a home? Apart from paying off any other debt, one way to save for the future, and perhaps to start investing to generate enough capital to buy a home, would be to invest in Property Unit Trusts (PUTs).
Why would PUTs be a good option for your bonus?
· If you do not already own property, this would represent an excellent method of gaining access to a property investment in a diversified portfolio.
· Because PUTs are collective investment schemes listed on the JSE Limited, you can invest much smaller amounts of money than buying property outright. Depending on your stockbroker, the minimum investment could be as little as one unit. This would not even be a deposit on most direct property investments.
· PUTs have a relatively low risk profile: currently PUTs have very low gearing, well under 20% on average.
· Diversification: PUTs invest in well-diversified portfolios across a range of properties in different geographic regions as well as in different market sectors. This spreads the risk for an investor substantially. The investor is also able to participate in the retail cycle, the commercial cycle and the industrial cycle. Each PUT does, however, have its own unique characteristics, so investors who favour a particular segment of the property market, or a specific region, could select a PUT which is tilted in that direction.
· Liquidity: Listed property is traded on the JSE Securities Exchange. As such, the investments are highly liquid. An investor can sell his stock and realise his funds within a few minutes of making the decision to sell.
· Maintenance of the properties is handled by professionals and investors are free to focus on other issues.
· Rent collection is also is handled by professional property managers.
· PUTs offer investors access to real estate and development opportunities which may otherwise be difficult to find.
· Investors can apply to their bank to gear against the investment in a PUT. The relatively high distribution levels, or income component, of a PUT allows an investor to pay down the interest component of the debt, if geared.
· The prices of PUTs have softened considerably over the past 12 months and, while attempting to market time is not recommended, many of them are showing better value with high relative yields.
Investors should note that at this stage, there is little or no exposure to residential property in PUTs. PUTs invest in commercial real estate, such as retail shopping centres, office blocks and distribution warehouses, and should be evaluated as separate investments in property regardless of how the residential market is performing.
