Immovable property shows up on the retirement fund investment radar

Retirement funds play a pivotal role in South Africa’s long-term savings environment. It is for this reason that National Treasury takes special care with regards to how pension fund managers allocate retirement assets. The new Regulation 28 has changed the savings landscape forever...

The new Regulation 28 of the Pensions Fund Act, in effect since 1 July 2011, is a regulatory intervention to ensure that retirement savings are invested in a prudent manner into suitable and diversified investment vehicles.

An encouraging change is the differentiation of immovable property and participation mortgage bonds, which were previously classified together under the same asset heading. A retirement fund is now able to invest up to 15% of its assets in participation mortgage bonds and an additional 15% in immovable property.

What this means is that retirement fund trustees can finally allocate meaningful amounts of capital to each of these asset classes, thereby ensuring a well balanced retirement fund investment strategy.

Property is one of the largest and most widely held asset classes worldwide. It is suitable for investors with moderate risk profiles as a middle-of-the-road investment option. Immovable property offers consistent long-term investment returns and can be used as a key component of retirement fund investment portfolios.

Property is a tangible investment that satisfies the dual retirement fund investment objectives of capital preservation and inflation-plus returns with minimal risk. Those who do not have enough capital for direct property ownership can enter the market by way of a property portfolio. Your retirement fund can invest in the immovable property asset class without you having to own or manage property.

Listed property is vulnerable to market sentiment and exhibits extreme volatility of return. Direct property, on the other hand, offers significant returns based on property investment fundamentals such as rental income and capital appreciation.

Direct property also offers investors the opportunity to diversify away from market-linked asset classes. An investor in this asset class avoids the day-to-day price activity of listed property companies due to valuations being carried out on an annual basis.

An immovable property portfolio typically fits the "moderate risk” description, promising consistent and stable investment return. This return consists of income from rentals and capital appreciation thanks to increases in the value of the underlying properties.

The rental income on the property portfolio escalates in line with inflation… And the underlying assets increase in value as the income stream grows. An increase in inflation leads to a commensurate increase in investor returns.

In addition to the attractive return a diversified property portfolio reduces the risk of losing capital. Diversification can be achieved by investing across property sector or geographical location. This investment principle minimises risk, as the investment is spread collectively over various property sectors and areas.

Adequately diversified property portfolios include a range of commercial, industrial and retail properties to protect investors from downturns in any of the sectors. Geographical diversification ensures that the risk associated with investing in property is spread over a combination of established and emerging regions.

Thus, a property portfolio is exposed to the returns that characterise both established and emerging property markets, with the stability of the return from established markets countering the volatility of return from emerging markets.

A property portfolio presents a retirement fund with an investment opportunity that provides a regular income stream from rental income coupled with long term capital growth. Retirement funds can invest in property portfolios – and reap the benefits of the security provided by property ownership – without directly managing or owning said properties.

The immovable property asset class satisfies the prudential investment guidelines set out in the new Regulation 28, affirming its place on the retirement fund investment radar.