Listed property an underpin for fixed income strategies
Fund managers and other investment professionals can choose from four main asset classes when they structure a portfolio. These include bonds, cash, equities and property – where the property subset typically comprises the listed property investments on o
It is worth noting the different structures available within the listed property universe. Investors can either purchase linked units in property loan stock companies, which hold direct investments in commercial, retail or industrial properties; or in listed property unit trusts (PUTS), which also invest directly in fixed property. Another option is via the collective investments industry where a number of property unit trusts funds are mandated to invest in listed property.
Listed property exceeds long term expectations
Local investors have enjoyed fantastic returns from the listed property sector in recent years. To find out about the asset class’ 2011 performance – and about prospects for 2012 – we attended a presentation by Mariette Warner, Listed Property Fund Manager at Absa Asset Management. “2011 was an interesting year,” said Warner, “because property returns are closely inked to the bond yield.” As the long bond yield falls – and it has exhibited extreme volatility of late – the SA Listed Property index rises. That said, the index mirrored other asset classes last year, swinging rapidly from its low point (down 9.6% by the end of the first quarter) to end virtually unchanged at 31 December 2011. The good news is that yields on listed property remained buoyant, ensuring an 8.9% total return for the full year!
Listed property comfortably outperformed bonds, cash and equities on a 12-month view… And over the past nine years (the SA Listed Property index was created in 2003) the asset class has delivered compound average annual returns of some 25%! In other words, property has trounced the JSE All share (18.2%) and All Bond index (10.2%) over the past decade... The five year performance is just as impressive with 14.3% per annum from listed property versus bonds (8.6%), cash (8.5%) and equities (8.1%). “Listed property has generated fantastic income for investors,” said Warner, before reminding investors that share selection played a huge part in listed property unit trust performance.
Warner provided a table of the real earnings growth achieved between 2007 and 2011 across a wide selection of property funds as proof. The best performer over five years provided 8.4% real annual compound growth versus a 9.2% contraction from the worst performer! An investor in the best performer would have turned R100 into R175 over the period – the middle-of-the-road opportunity turned R100 into R146 – while the worst performer almost halved the initial investment.
Matching property funds with investor requirements
Warner said the optimal mix of listed property investments would vary from one fund manager to the next based on their specific requirements. She discussed strategies suited to long term value investors, income dependent investors, high risk speculators and those keen on price arbitrage opportunities.
“Listed property exists to beat the performance on bonds and cash,” said Warner. The fantastic performance over one, three, five and even nine years – which saw listed property trounce all other asset classes – has been great for long term value investors. The combination of income and capital growth over a long period has enabled fund managers to produce truly staggering returns. Income dependent investors have been well served too, thanks to the likes of Fountainhead Property Trust, which Warner singled out as a proxy for index. This conservatively managed company has grown its distributable income per unit each year going back to 1994!
Speculators have enjoyed a field day thanks to funds offering different distribution strategies under the same umbrella. Warner discussed this section with reference to Hospitality Property Fund’s ‘A’ and ‘B’ units. During the property market boom of 2002 to mid-2008 speculators made a killing by backing the higher distribution on the ‘B’ units over the safer but lower ‘A’ unit returns. A shift in economic fortunes beginning 2009 led to lower interest rates and a more difficult rental market – with the result returns on the ‘B’ units dried up too! It is extremely difficult to calculate Net Asset Values when distributions vary – so such speculation is only for investors with strong nerves!
Price arbitrage opportunities make more sense for cautious fund managers. Absa Asset Managers takes advantage of price volatility to ‘bottom fish’, adding sensibly priced units to their portfolio. “With price arbitrage the risk can be assessed,” said Warner. She used a graph of Vukile Property Fund’s dividend yield divided by the index dividend yield to demonstrate clear ‘buy’ and ‘sell’ opportunities...
A similar plot for 2012
Warner expects 2012 to play out along similar lines to 2011, though she predicts more stable returns from listed property thanks to a stable long bond market. “If we look at the SA inflation cycle we can only conclude that bonds are expensive at present (based on real bond yields), but not as expensive as mid-2010 and well below the ‘peaks’ in early 2000 and 2004,” she said. Property remains a higher risk than bonds, so investors should expect a risk premium on property.
As Q1 2012 flashed by the listed property sector offered an attractive 8% forward yield – giving investors an opportunity to ‘sample’ South Africa’s growing rental income streams. Share selection remains critical and fund managers who want to deliver market beating returns will have to carefully consider their listed property investments as well as the inflation risk to long bonds. The inflation risk is offset by the 4% to 5% per annum forecast growth in rental yields.
Editor’s thoughts: Absa Asset Management expects South Africa’s rental vacancies to improve from 2013 – with rental income following suit the year after. As for the current year, investors can look forward to similar returns to those generated in 2011. And that means we’re ‘booking’ around 8% total return from listed properties. Do you consider listed property investments for your client’s discretionary capital – or do you rather leave the ‘income’ generating investments to retirement fund managers? Add your comment below, or send it to gareth@fanews.co.za
