Ian Fife

Exposure to 17 property funds

Cheaper than other investments

“The Sapy index is extremely top heavy, with three funds making up half of it. Each counter in the new ETF will be given the same weight of 10% of the index, regardless of market cap”

— JEFF ZIDEL

You know it makes sense to have a property investment other than your home. The average high net worth individual holds one third of his assets in property and 25% in equities, according to UK property consultants Knight Frank’s 2010 global survey of the wealthy.

Trouble is, you’re too busy to buy a flat and manage a tenant, you can’t afford a prime office building or a property portfolio that somebody can manage for you and you don’t know enough about listed funds to choose which one to buy.

The laziest way you’ll get to directly own a property portfolio is to buy exchange-traded funds (ETFs) on the JSE. ETFs are shares that give investors direct access to a basket of equities. You can track and trade ETFs all day, unlike unit trusts that can only be traded at the end of the day.

There is only one property ETF on the JSE, Proptrax, which was launched in 2007 by Property Index Tracker, a company in the Resilient stable of listed funds. It tracks the FTSE/JSE SA-listed property index (Sapy) made up of the 17 funds in the property sector of the JSE.

The sector’s biggest fund, Growthpoint, has a market capitalisation of nearly R25bn, about 24% of the sector’s R110bn market cap. So 24% of Proptrax’s capital is invested in Growthpoint shares and only 0,63% is held in the smallest cap fund, Hospitality B Proptrax’s asset administrator, Sanlam, buys and sells individual funds as their relative weighting changes in Sapy. Jsapy has grown slowly, building over 30 months to its R280m market cap.

Institutions dominate the ETF, holding 80%. “Retail investment only started growing recently after the launch of the Web-based Eftsa investment platform,” says Proptrax MD Stephen Delport “It allows investors to buy ETFs for as little as R300/month or a lump sum of R1000.”

Mike Brown, founder of Satrix and one of SA’s ETF experts, heads Eftsa.

You pay a 0,75% annual ETF management fee deducted from payouts distributed every three months. Delport says ETFs have lower management costs than other investment products.

The current forward yield on the Sapy index is about 8,5%, so you should reap an after-management-cost 7,75% yield on your Proptrax investment. If you buy directly through your Internet-based stockbroking account, you’ll do better than buying through a financial adviser.

As with all listed property funds, your payout is mainly an interest payment and taxable after deducting an initial allowance. So if you’re paying 40% tax, you will have to slice off about 3% of your 7,75% payout for Sars. This would leave you with an after-tax yield — the equivalent of a normal dividend — of just under 5%. With it comes the steady, predictable, compounding annual growth in income that is property’s biggest advantage. But if you’re paying 40% tax, what are you doing at the retail end of the market anyway? You should be looking for somebody to advise you about investing directly into listed property funds.

Proptrax chairman Jeff Zidel says he plans to launch a second property ETF, Proptrax10 as soon as Proptrax has Financial Services Board and JSE approval to list it. “The Sapy index is top heavy, with three funds, Growthpoint, Redefine and Pangbourne making up half of it,” says Zidel. “Proptrax10 will track another index, the Jsapy equal weight index. Unlike Proptrax, this index isn’t weighted by each fund’s market capitalisation. Each counter is given the same weight of 10% of the index, regardless of market cap.”

Theoretically, the price of an ETF needn’t exactly follow the price of the collective funds (see graph), though Sanlam’s Johann Hugo says it has tracked Sapy exactly in the latest quarter. In the US, institutional investors make a market out of the arbitrage any disparity offers. When ETFs are more expensive, they sell them and buy the underlying funds. When the ETF is cheaper than the funds, they sell the funds and buy ETFs.

Proptrax investors have the right to redeem the actual property funds of the equivalent value, though only the institutions will have ETFs of enough value to be able to be issued with all 17 listed funds in their market cap proportions. But Zidel says Proptrax wants to discourage such arbitrage, particularly while the market in Proptrax is still being developed. So Proptrax charges 7% of the value of the transaction as a redemption fee.

An ETF is the ideal entry into the stock exchange. It behaves like an ordinary JSE counter without you having to do the research and tracking of its performance a single share needs. It is hoped you will become familiar with the underlying shares and eventually start investing directly in them. It’s a lot easier to do that than financial advisers would like you to believe, particularly with the steadiness of property shares.

Source: Financial Mail