Investing in Listed Property: should you?

Recent market turmoil has lead to investors seeking alternative safe havens for their cash, and in most instances, gold has come up trumps. But as the adage about eggs in basket goes, you should not be exchanging your home and everything you own for bullion.

Speaking at a recent JSE Listed property showcase, Frank Berkeley: Managing Executive of Nedbank Corporate Property Finance, provided insight into investing in property shares.   

‘Holding property shares is an important element of a balanced investment portfolio. The listed property sector has yielded excellent returns over the past few years, and, in terms of the JSE, it has been one of the best performing asset classes.’

There are many benefits to investing in property shares, some of which include a reasonable predictability of income with leases in place; good returns as income is taxable and volatility is relatively low in the share price.  Property also serves as a hedge against inflation over the long-term because rentals usually increase by at least the rate of inflation each year  But as with any investment, it is important that you do your homework and research the options that are available to you. 

“The way you evaluate listed property funds is not unlike the way you assess the value of a unit trust. It’s important that you look at the size of the fund, its underlying liquidity and the quality of the portfolio.  In this instance, research what makes up the portfolio and if it is of decent quality.  Also, look at the amount of the properties in the fund to determine if the number is manageable and whether or there is infrastructure in place to do so.  

While the flow of income is fairly steady, know the numbers and the reliability of the income guidance.  ‘Look at the quality of the earnings and determine if it’s actual property income and where this comes from’, says Berkeley.  

Lastly, and certainly not of least importance, check the quality of management by doing a search of their history.  A good ethically run fund will go a long way to deliver the returns you desire.  

What is a listed property fund?

Listed property investments are made up of commercial property portfolios that are wrapped into a single entity. They are listed on the JSE, can be invested in like regular shares and are managed by specialist property fund managers.  The portfolios contain a wide variety of properties that can include shopping centers, commercial buildings and warehouses. The investor can earn a share of the rental income in the short term and also benefit from the capital growth of the properties in the long term. 

There are different types of listed property, such as: 

Property loan stocks: These offer the investor the option of purchasing a unit, which has both a share and a loan element to it.  The loan component pays interest to the investor from income received by the portfolio after expenses have been deducted. This can be a good investment for people looking for income generation.  

Property unit trusts: These are collective investment schemes as the money from investors is pooled into a fund. PUTs are considered to have one of the lowest risk profiles of property investment vehicles, and investing in them has a number of benefits. Firstly, they provide an accessible vehicle for investment in prime, well-located property, available in low-denomination units; they are easily bought and sold on the JSE Limited which obviously makes them easier to trade than physical property. Investment in a PUT does not require specialised property management expertise because they are managed by professional highly regulated management companies.

The value of the shares you hold will increase or decrease as the properties in the portfolio appreciate or depreciate in value. 

Property Information - (Source : JSE)

* JSE currently has 410 (of which 70 are AltX) companies listed with overall market cap of R6.4 trillion 
* 37 of the 410 companies are Real Estate 
* Real Estate is under Financials industry which constituents 16.7% of the overall JSE market cap
* Real Estate super sector comprises of Real estate investment & services and Real Estate investment & trust sectors
* Real Estate companies have overall market cap of R187bn
* Real Estate companies constitute 2.9% of the overall JSE market capitalisation
* Real Estate consitutes 18% of the Financial industry market cap of R1.04 trillion