Property index outperformance

Old Mutual funds beat property benchmarks

Returns on industrial properties in funds managed by Old Mutual Investment Group Property Investments outperformed the Investment Property Databank industry standard for 2007 by as much as 16%, says Ben Kodisang, the company’s managing director.

He says the combined institutional portfolio managed by OMIGPI achieved a total return of 40,9%, more than 13% better than the IPD figure of 27,7% for 2007.

“Capital growth in the combined institutional portfolio at 34% was also substantially ahead of the IPD figure of 17,7%. A major contributor to the outperformance was the 50,6% return on the funds’ industrial properties, way ahead of the IPD benchmark of 33,6%. “

Kodisang who is also chairman of the OMIGPI-managed SA Corporate Real Estate Fund, says SA Corporate also outperformed the IPD industrial benchmark with a 35% total return.

“SA Corporate’s income return of 9% was also ahead of the IPD figure of 8,6%.”

Colin Young, head of institutional investment at OMIGPI, says the 2007 performance of 40.9% marked the third year running that the combined institutional portfolio had outperformed the IPD index.

“The portfolio’s return excludes compounding - taking the effect of re-investing the monthly yield into account, which the pension funds do to determine annual returns. If this yield compounding was taken into account, the 2007 institutional total return was 44.6%. “

Young says the institutional portfolio’s total return of 37,2% on office properties also beat the IPD figure of 30,8%. Capital growth on the funds’ retail properties of 18,8% was also ahead of the IPD result of 16,8%.

“These results confirm our assertion that direct property should have at least a 10% allocation within a well diversified institutional fund. Over the past 13 years, as shown by the IPD results, direct property has generated an excellent 10% real compounded total return. Direct property delivered similar returns to equities in 2007, but at a third of the volatility, making it a very attractive asset class.”

Young says the creation of the Triangle Real Estate Funds through unitization of the core portfolio meant institutional investors could now have a stake in properties contributing to the annual returns of up to 40% in recent years. The largest Triangle offering is the Triangle Core Fund, an open-ended fund available to institutional pension funds for investment at quarter ends.

Craig Ewin, CEO of SA Corporate and head of listed real estate at OMIGPI, says SA Corporate’s returns have been driven by underlying rental growth and that yield compression has been limited.

“This rental growth has been particularly evident in the industrial properties where valuations showed the biggest relative increase in value in the SA Corporate portfolio last year - with capital growth of 22,8% against the IPD figure of 21,3%.

“The forward yields, as at December 31, of 8% on the fund’s industrial properties, 8,9% on the retail component, and 8,5% on offices not only reflect the quality and nature of the fund’s assets but underscore the portfolio valuations and the sound underlying investment value in the fund.

“In the case of SA Corporate, the independent valuation of the portfolio at R8,5 billion at December 31 meant a net tangible asset value of 370 cents per unit. The units are currently trading at a meaningful discount to this underlying asset value suggesting attractive investment value. “

Young and Ewin say the institutional and listed funds have taken advantage of conditions supporting the sector-leading performance of industrial properties in the IPD results with industrial investments underway totalling R600 million in Johannesburg and Cape Town.

Ewin says SA Corporate continues to see a strong performance in the industrial sector, with shrinking supply of rental and rising market rentals impacting on property earnings.

“The potential upside in expiring leases and rental reviews in the portfolio continue to be the highest in the industrial component, where the current rentals in the market are some 20% higher than the average fund rental of R27,50/m² . Office rentals also continue to offer attractive upside, while the retail sector lags in line with prevailing sentiment. “