Stock market volatility is turning the focus to better asset allocation

George Radford, Director of Africa at IP Global.

The low correlation between fundamentals that influence property price growth and those influencing the stock market is causing investors to reassess asset allocation. Many are turning to property investment as an increasingly important growth element of their portfolio as well as an asset diversifier amid stock market uncertainty.

George Radford, global property investment firm IP Global’s Director of Africa, says asset performance comparisons indicate property has been a superior investment over the past 20 years.

For property investors in South Africa, investment in Sandton, Melrose Arch or the Atlantic Seaboard has outperformed the JSE, Radford says. “But while the local market has done well for a lot of our clients, offshore property investment offers additional potential value growth as a geographical and currency diversification.”

Diversification into bonds, cash or commodities is not as reliable as it used to be. “Commodities no longer move completely independently of equities, and recently the direct negative relationship between stocks and bonds has become weaker, meaning it is now more difficult to rely on bonds to hedge against equity market swings,” adds Radford.

“Property still has a low correlation to stocks, bonds and commodities, and while it is affected by the wider economy, it is a lagging indicator, so the effect of events which spark market swings take longer to feed through to real estate compared to most other markets.

“Factors which influence the property market – which may include population growth and an inelastic supply side that fails to keep up with demand – are unique to this asset class,” he says.

Radford says asset comparisons show equally that to think in terms of cash does not make much sense. Currently stock markets are overvalued, and investors with a lot of stock market exposure have to rethink their strategies. With opportunities for cheap financing and with interest rates not going up much, or being fixed in certain places like Germany - where many of our clients enjoy 2% interest rates fixed for ten years - property is providing currency and asset diversification as well as reasonable mortgage rates, income yield and protection from volatility.”

“It is well documented that during economic downturns or stock market crashes, property is much slower to react,” says Radford. “It is slower from a transactional perspective, and this directly relates to volatility. If one includes the ongoing income stream from rentals, the volatility that exists elsewhere is almost completely removed.”

IP Global points out that within the property asset class, there is a difference between residential and commercial property, and while economic shocks may be felt in demand for office space, these effects are much weaker in the residential housing market.

Radford warns the factors driving growth in some areas may not be the same in others. In London, for example, property has significantly outperformed other key asset classes over the long-term in terms of asset value. If rental income is included, there is significant additional value in the form of an income yield so there is long-term capital growth as well as income generation. London property values, on average, double every ten years.

“It is important that property provides an asset class diversification as well as a geographic and currency diversification,” Radford says.

“The traditional asset allocation rules do not necessarily apply anymore. Whereas investors would have, for example, held bonds or cash, investors are looking for better options in terms of potential growth in value,” Radford concludes.