Investing in property made easy: The 101 Principle
With the markets starting to stabilise, an astute investor will continue to invest in terms of his or her long-term investment plan, and will include property in that plan. There are different ways to invest in property; this article has a look at some of them.
There are many access points to property and investors should consider the different options available to them before making a decision, says Craig Hallowes, spokesperson for the Association of Property Unit Trusts (APUT).
“Even though markets are down, investors are urged to persevere with their long-term investment plans and keep building up balanced portfolios, which have traditionally included all the main asset classes, namely:
o property (both in the form of listed property and direct property)
o equities (or shares)
o bonds (debt instruments issued by government or corporations with good investment grades)
o cash
Particularly in the listed space, their correlations to one another over time are relatively low, which provides investors with good portfolio and risk diversification, as the lower the correlation between asset types, the less likely they are to be affected to the same degree by changing market conditions.
While listed property tends to trade like a bond in normal market conditions, because of the income component of property, listed property also has a growth component which can decouple it from bonds in a steadily rising market,” says Hallowes.
Hallowes considers seven property investment options below – from an investor’s point of view – and discusses what he considers to be their relative strengths and weaknesses.
|
Access point |
Main features |
Advantages |
Disadvantages |
|
Listed property |
Property Unit Trusts (PUTs) and Property Loan Stock (PLSs), which are effectively REIT’s, and which are listed on a financial exchange like the JSE. They have medium to large market caps and diversified portfolios |
· They are highly liquid · They’re managed by professionals who can select the best properties · The costs are explicit · There is considerable diversification of assets, both geographically and across sectors · PUTs and PLSs are highly regulated vehicles, which protects investors |
· A limited downside is that you can’t control which properties are purchased, but you can sell on the JSE, which is a very liquid market, if you do not like the strategy of the PUT or PLS |
|
Direct property ownership |
Buying your own property outright to rent out |
· You have full control over the investment |
· A lack of liquidity, and lengthy turnaround times trying to buy or sell · The need to actively manage your investment · Rental yields are still low in residential property. · There is a high entry cost involved · There is little or no diversification of assets |
|
Joint venture/ partnership |
Buying an investment property in conjunction with other parties |
· You gain access to higher value properties than would be possible on your own |
· A lack of liquidity · Potential disagreements with partners · While potentially better there is still little or no diversification of assets · Low income yields |
|
Property Syndication |
An unlisted investment scheme that enables a group of investors to buy property and become part owners of it, either directly or indirectly. The schemes can be structured in different ways, with different cost layers attached to them. |
· Your initial capital outlay may be lower l on entry as the investment is spread amongst a group of investors |
· They can involve very high initial and management costs · There is no formal market and therefore it is not well-controlled · There are liquidity constraints, making it difficult to exit the investment. These are a result of the lack of a formal market · There is scope to manipulate property values · Generally there is little or no diversification of assets |
|
Exchange Traded Funds (ETF) |
An ETF is established as a listed collective investment scheme, like a unit trust. The aim of the scheme is to replicate, as far as possible, the price and yield performance of a specified Index, in this case, the Listed Property Index. The units or shares of the funds are generally listed on a financial exchange like the JSE. |
· They are easy to access and there is a low entry cost · They are flexible, it is easy to scale up or down · They are highly liquid, like other listed entities · There is greater transparency in terms of the investments and interests · ETFs are a well-regulated market |
· If you like to actively manage your portfolio, this may not suit you |
|
Collective Investment Schemes |
A unitised fund set up under a trust deed that allows investors to participate in a larger pool of assets, in this case, a pool of property assets. |
· They are highly liquid · They are managed by professionals · All the costs are explicit · There is considerable diversification of assets, both geographically and across sectors · CISs are a highly regulated market |
· They tend to track the index in any event, due to the relatively small universe of listed property shares and unitsThere can be steep management fees involved |
|
Offshore property, in any of the above investment vehicles |
Offshore property investments can be made in any of the vehicles shown above. However, the additional dimension of offshore investment diversification is added, for example, property in London or Paris, both from a geographical and currency perspective. In some instances, investors gain access to other sectors, such as infrastructure. |
· This offers good diversification, as you can spread your risk across different geographic regions |
· You take on exchange rate risk · You may not understand the foreign market, and could end up investing in low-quality properties. · If you are investing in direct offshore property such as residential flats, ask the question: why did they come to Africa to sell the property, and why could they not sell the property in their own market (if it is so good)? |
“Institutional investors generally look at investing 5% to 15% of a portfolio in property and individuals can follow same logic in their own investment portfolio. Whether by debit order in the case of ETF’s, such as PropTrax or CIS’s, or geared investments in the case of PUT’s or direct property, the combination of income distribution and the possibility of capital appreciation that property provides should appeal to most prudent investors” concludes Hallowes.
