Keep investing in a diversified portfolio, despite the temporary turmoil
Even though markets are down, the wise investor will stick with his or her long-term savings plan, and will include property in that plan. There are many different ways to invest in property; this article has a look at some of them.
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.”
“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. We have had a look at seven of them and listed their strengths and weaknesses, from an investor’s point of view,” he says.
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Access point
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Main features
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Advantages
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Disadvantages
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Direct property ownership
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Buying your own property outright to rent out
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You have full control over the investment
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A lack of liquidity
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The need to actively manage your investment
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Rental yields are still low
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There is a high entry cost involved
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There is little or no diversification of assets
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Joint venture/ partnership
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Buying an investment property in conjunction with other parties
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You gain access to higher value properties than would be possible on your own
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A lack of liquidity
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Potential disagreements with partners
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There is little or no diversification of assets
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Low income yields
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Property Syndication
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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.
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You pay a lower individual entry cost as it is spread amongst a group of investors
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They can involve very high management costs
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There is no formal market and therefore it is not well-controlled
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There are liquidity constraints, making it difficult to exit the investment. These are a result of the lack of a formal market
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There is scope to manipulate property values
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Generally there is little or no diversification of assets
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Listed property
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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
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They are highly liquid
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They’re managed by professionals who can select the best properties
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The costs are explicit
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There is considerable diversification of assets, both geographically and across sectors
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PUTs and PLSs are a highly regulated market, which protects investors
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A limited downside is that you can’t control which properties are purchased, but you can sell in the very liquid market if you do not like the strategy of the PUT or PLS
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Exchange Traded Funds (ETF)
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An ETF is established as a 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.
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They are easy to access and there is a low entry cost
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They are flexible, it is easy to scale up or down
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They are highly liquid, like other listed entities
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There is greater transparency in terms of the investments and interests
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ETFs are a well-regulated market
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If you like to actively manage your portfolio, this may not suit you
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Collective Investment Schemes
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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.
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They are highly liquid
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They are managed by professionals
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All the costs are explicit
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There is considerable diversification of assets, both geographically and across sectors
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CISs are a highly regulated market
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They tend to track the index in any event, due to the relatively small universe of listed property shares and units
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There can be steep management fees involved
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Offshore property
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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.
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This offers good diversification, as you can spread your risk across different geographic regions
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You take on exchange rate risk
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You may not understand the foreign market, and could end up investing in low-quality properties.
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If you are investing in direct offshore property, 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)?
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