An interesting article by Bruce Cameron of Personal Finance on July 28, 2013 about raising your savings through use of listed property.
Listed property has come of age, producing
solid returns and diversifying risk. It should be in the investment
portfolio of every retirement fund and, in particular, in the investment
portfolio of every pensioner.
Property is the “warrior asset
class”, Dries du Toit, a financial consultant and former chief
investment officer of Sanlam Investment Management, said at the IPD
annual property investment conference held in Cape Town this month.
Du Toit says that 90 percent of
asset managers have missed out on average returns of 20 percent and more
a year over the past decade, simply because they ignored property.
The Alexander Forbes Large
Retirement Fund Manager Watch for June 2013 shows that only three
percent of retirement fund assets are invested in property.
The listed property sector not
only performed well in the context of South Africa, but it also beat
property prices in all developed countries.
Du Toit attributes the lack of
asset manager interest in the local property sector to the disastrous
under-performance of property in the late 1990s – it has since become
the forgotten asset class.
Currently,
listed property accounts for almost four percent of the total
capitalisation (value of all issued shares) of the JSE. It is expected
that, with the launch of a real estate investment trust (Reit) sector on
the exchange, more property companies will list on the JSE and more
foreign investment will flow into the local market (see “Common
structure gives investors confidence in Reits”, below).
Du Toit says a conservative
assumption is that an investment in listed property will provide a
return of between eight and 12 percent a year in the immediate future,
while a direct investment in commercial property should provide a return
of between 10 and 14 percent a year.
“Nothing is better than this if you are a long-term investor.
“No pension fund, no guaranteed
annuity will give you this type of return. Listed property is an ideal
investment for a pensioner,” he says.
While you are saving for
retirement, you are permitted to invest a maximum of 25 percent of your
savings in listed property in terms of the prudential investment
requirements of the Pension Funds Act. This restriction does not apply
to investment-linked living annuities, where pensioners choose how to
invest their retirement savings to generate an income.
Du Toit says that a significant
advantage of listed property when you save for a pension or invest your
retirement savings for an income is that you do not pay income tax on
the rental distributions or the capital gains.
Du Toit
says the 30-year global bull market in bonds, which has played a major
role in the relatively high income provided by guaranteed annuities, has
ended, because we have entered a prolonged period of low interest
rates. Bond yields are dictated by prevailing and expected interest
rates.
“Interest rates will remain in
single digits. Property will provide better and more stable returns than
bonds in most years,” he says.
One of the main advantages of
listed property is that it provides a steady income stream of about 7.5
percent a year based on current share prices, Du Toit says.
He says that a steadily improving
income stream means that people, such as pensioners, who are on a fixed
income do not have to worry about the underlying share price.
He doubts that the listed property
sector’s average return of 20 percent a year over the past decade will
be repeated soon, but he strongly believes that listed property will
continue to provide sound returns.
Du Toit says that listed property has a track record of:
* Being
remarkably resilient under all market conditions. There has never been a
year in which South African listed property has had negative
distribution growth.
* Providing stable and growing distributions (rental), as well as capital growth.
* Performing well when interest
rates are stable and when inflation and interest rates are falling. The
biggest risk to property investments is sharply rising interest rates,
because this undermines the affordability of borrowing to buy property.
* Liquidity (it is easy to sell
your investment). You can buy and sell shares in property companies
and/or invest in collective investments (unit trust funds and exchange
traded funds) that invest in property. If you invest directly in
property, your investment is often very illiquid.
Du Toit says it is expected that the listed property sector will receive further impetus from:
* More property companies listing on the JSE.
* The introduction of Reits on the JSE. Reits are likely to attract money from two sources:
– Occupational retirement funds
and retirement annuity funds. Du Toit says that listed property is a
return-enhancer and plays an important part in diversifying risk in a
balanced investment portfolio.
– Offshore. South Africa, which is
the world’s eighth-largest Reit market, has been added to global Reit
indices. Many institutional investors are index investors, so more money
is expected to flow into the local market from offshore.
COMMON STRUCTURE GIVES INVESTORS CONFIDENCE IN REITs
On May 1 this year, South Africa’s
listed property sector was brought into line with international
standards for listed property when the JSE launched a real estate
investment trust (Reit) sector.
Reits are listed companies that
own rental-producing property and distribute rental income, in the form
of taxable interest, to the holders of shares or units.
Estienne
de Klerk, president of the South African Property Owners’ Association
and executive director of Growthpoint, says that Reits will eventually
replace listed property unit trusts (PUTs) and property loan stock (PLS)
companies, simplify taxation and enhance fund governance. Growthpoint
is the largest listed property company in South Africa.
Reits are listed on some 25
international stock exchanges. They have similar rules and structures,
giving investors confidence when they invest in property in a foreign
market.
Reits are structured so that no
income tax is payable on rental income in the hands of the listed
company and no capital gains tax is paid on a gain from the sale of
property owned by the company.
Distributions, in the form of
interest, are taxed in the hands of shareholders from the first cent –
there are no tax exemptions on interest or rental earnings (except for
retirement fund investors). This is in line with government’s move away
from tax exemptions on interest, which it proposes to replace with
tax-incentivised savings accounts for individuals.
In South Africa, Reits invest
predominantly in retail, office, industrial, hotel and hospital
properties; their exposure to residential property is limited.
Tower Property Fund, launched by
Spire Property Group, this week became the first property fund to list
on the JSE under the Reit structure, joining 16 companies that listed as
either PUTs or PLS companies and have now converted to Reits.
The
market capitalisation (value of all issued shares) of the JSE property
sector grew from R61 billion at the end of June 2003 to R328 billion at
the end of June 2013.
There are 45 property companies on the JSE, accounting for 3.8 percent of the stock exchange’s total capitalisation.
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